Turing Test

By Rick Nason, PhD, CFA 
Partner, RSD Solutions Inc. 

The British mathematician, World War II code breaker, and one of the 
Grandfathers of the computer developed the Turing Test.  In the Turing Test, 
a person stands before two curtains.  Behind one curtain is a computer.  
Behind the second curtain is another human.  The Turing Test is whether the 
human in front of the curtains can tell which curtain the computer is behind. 

Risk departments for a variety of reasons are becoming more and more 
computerized as more and more risk analytics are deemed necessary.  However 
is your analytics heavy risk management system smart enough to pass for a 
human?  Is your risk management analytics setup smart enough that you only 
need humans solely to feed it data?  Is your Board hoping that the risk 
management "brain" of the company passes a Turing Test?  Or is no one 
thinking of asking this question?  (What are the implications of not asking 
this question?)

Customers

by Rick Nason, PhD, CFA 
Partner, RSD Solutions Inc. 

All good business units put a focus on the customer.  Who is risk 
management's customer (customers)?  What keeps that customer(s) happy?  
What do the customers value?  If risk management is a business, what is the 
ROA of that business?

Unscripted

 

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

Risk management procedures are a script; a set of decision trees.  Dodd
Frank and Basle III are the ultimate scripts, in which no stage direction is
left for the actor to interpret.    However do you think the Gods of risk
use a script? 

Problems are unscripted.  Issues are unscripted.  Danger is unscripted. 
Opportunities are unscripted. 

Are your risk managers acting according to script?

Analogy

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

Steve Lindo, who is a risk expert with extensive experience in risk management, recently wrote a very interesting paper in the Journal of Risk Management in Financial Institutions. The title of the paper is “Risk Management Infrastructure as a Living Organism”[1]

In his paper, Steve creates the analogy that risk management in a financial institution is like one of the body’s critical systems. To quote the abstract, “This paper examines the essential elements of risk management infrastructure in a financial institution using another complex, intelligent, adaptive organism as an analogy – the human anatomy.”

There are many things to like about this paper, and in particular the fact that it points out that risk management and the management of financial institutions is a complex task (as opposed to a complicated task). This implies that you need to treat risk management and strategy in a holistic manner. You cannot fix solely the heart if it causes the nervous system to malfunction.

However the main thing I like about this paper is that it uses an analogy from another field – namely anatomy. As risk managers we have a lot that we can learn and use from examining how other fields of practice handle similar issues. Using analogies helps one to see things in a slightly different way, and that in turn leads to breakthroughs. The types of problems in risk management also exist in other fields. The use of more analogies like Steve Lindo uses will help us in risk management to learn better, faster and more efficiently.

[1] S. Lindo, 2013, “Risk Management Infrastructure as a Living Organism”, Journal of Risk Management in Financial Institutions, Vol 6, 1, 67-74

Technical Presentations

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

Non-technical people do not like technical presentations. In my experience this tends to be particularly true for executives (but not all executives). Technical people also tend to squirm through non-technical presentations, and also tend to take them less seriously than they should. Two facts that are often not appropriately appreciated in risk management.

Carlin CRO

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

Waiting for my wife to get ready to go out this past weekend, I watched an old tape of the late comedian George Carlin. I have been a big fan of George Carlin since I was in high school. I really liked the way that he took our collective arrogance and brought it down to size. George Carlin made a career out of taking people’s opinions and actions about issues and events, and taking them one step further than most to show how illogical some of our most rational seeming ideas can be. In essence he showed the absurdity of conventional wisdom.

After watching the tape, I asked myself howe as a finance professor.ame="L鄰甯翿

Middle School

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

In Middle School (grades 7,8 and 9 where I grew up) we were allowed to read anything we wanted for 20 minutes each morning. Anything. Of course, middle school kids will be middle school kids, and so for the first few weeks students tried to see how far they could take the read “anything” rule. Yes, there were reading materials that would not be appropriate for that age group, and yes there were comic books etc. However in a short period of time something funny happened; namely kids started reading “good” stuff, namely stuff that was educational, literate or just plain interesting and useful. Students actually looked forward to reading time, and anecdotal evidence indicates that they did a lot more reading at home – despite the popularity of Mork and Mindy (obscure reference for those of a certain age). I am willing to speculate however, that once we were forced to read in High School that our willingness to read – to read anything – went down dramatically.

Left to their own choices, most reasonable people will make good choices, and they will make those good choices willingly. Forced to do something however and the task becomes harder to accomplish, and is only done grudgingly.

Dr. Heidi Grant Halvorson, in her book Success: How We Can Reach Our Goals, http://www.amazon.com/Succeed-How-Can-Reach-Goals/dp/0452297710/ref=sr_1_2?s=..., talks about this phenomenon as tasks that we perform with an intrinsic motivation - tasks that we perform to please ourselves - versus tasks that we perform with an extrinsic motivation– tasks that we perform to please others, or because others force us to. The evidence is clear from numerous studies that developing an intrinsic motivation in students leads to much better results.

At this point you may be asking what the heck this has to do with risk management. As an external consultant to several different types of institutions I see a similar effect all of the time when it comes to risk procedures. This is particularly true in financial institutions. Bankers often feel that the risk rules are needlessly rammed down their throats without them having any say. Basically this leads to resentment at best, and hostility towards the risk department and the risk rules in many cases. Bankers are forced to be extrinsically motivated, and the results are far from optimal.

In times of crisis, certain risk rules may have to be followed. However in non-crisis situations a little bit of managerial skill on the part of the risk department may go a long way. If you allow reasonable employees to make their own choices, in time you will find that they will make very reasonable choices, and will do so willingly and to much greater effect.

Perhaps risk managers should take a page from my Middle School Principal.