Thinking Templates

 

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


I am currently in the middle of marking exams for a MBA course I teach on
Quantitative Decision Making.  In this course, as in all of my courses, I
strive to convince students that knowledge is a commodity and learning how to
think is more important.  In part to walk the talk, I allow my students to
have open book exams and to use a computer on the exam.  This of course
means that they can use computer software packages etc.

In preparation for the exam, many students will create answer templates for
the types of questions that they expect me to ask.  Some students go so far
as to seek out commercially available packages.  I am all in favour of this,
since in the process of doing so the students are probably doing a better job
of studying than they would if they were attempting to memorize a textbook (a
deadbrain exercise in and of itself).

The problem arises however with students who blindly follow their
templates.  Rarely in life does a problem conform exactly to whatever
template you might construct, and in the case of my exams that is also
generally true.  However students are more confident in the ability of their
template than they are in their ability to think.  Or perhaps they are too
lazy to think and thus rely on the template.  Either way it generally does
not end well.  Templates do not think.  Furthermore, any problem that is
solvable by a template is probably not worthy of the attention of someone
with a graduate degree such as an MBA.

In risk management we also tend to rely on templates.  (Anyone seen a risk
audit template?)  In regulation we are almost totally reliant on templates
– although bureaucrats would never label their proclamations as such.  As
with the students writing my exams who rely on a template, risk practitioners
and companies (and regulators) that rely on templates see outcomes that are
rarely satisfactory.  Templates do not think.  The real world rarely
conforms to a template except in the most simplistic of situations.

I realize that many consultants rely on templates – they generally have
fancier names for them.  Many consultants market themselves on the strength
of their template(s).  But again, templates do not think.  Templates do not
adapt.  Templates do not create paradigm shifts.  Templates do not see
unique opportunities.  Instead templates are static, backward looking,
unthinking processes that time and reality quickly pass by.

Now if only there was a foolproof template for marking.

Perfect

 

*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc/*

What if everything was always perfect with a company?  In other words, what
if a company never made a mistake, never had a debacle, and never made the
front page of the business news for all of the wrong reasons?  Furthermore,
what if projections were very clear that this good fortune would continue
indefinitely into the future?   Such a company is obviously fictitious, but
would our fictitious company still need a risk management unit?

Those who argue that risk management is solely to take care of downside risk
would clearly answer no – the company would not need a risk management
unit.

Those who subscribe to the idea that risk is maximizing the probability and
magnitude of good risk events happening, while also managing so as to
minimize the probability and severity of bad risk events would argue yes.

Just because a company does not suffer downside risk does not mean that it is
perfect.  If anything it probably means that the company is stale and far
from maximizing opportunities.  In fact, it is likely that a company that
never experiences downside risk is a company most in need of a competent risk
management unit.

146-0

 

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


146-0.  That is the combined score of two professional Nigerian soccer games
recently according to SI.com.  One game had a score of 79-0, while the
second game had an equally ridiculous score of 67-0.  While I was once in a
hockey game where the score was 24-0, it was when I was 10 and we were
playing a select team of 14 year olds.  In a professional soccer game
however such a score is absurd.  Or is it?

As you may have guessed, each of the four teams in the two different games
conspired to run up the score so that the winning team would be promoted to
the next level.  Apparently it was simple math in terms of score
differential that would get them promoted - thus the organized lunacy to
produce such a crazy score.

At this point you might be thinking to yourself that this is all quite
interesting, but what the heck does it have to do with risk management –
and the answer is obvious.  With all of the regulation, particularly in the
financial sector, companies and organizations will go to crazy uneconomic
lengths to "make the numbers". 

One only has to look at the car industry and the pricing of electric cars to
see how the auto makers are going to insane extremes to "make the
numbers" on fuel efficiency.  Anyone who has been around Greco-Roman
wrestlers knows that they also go to bizarre methods in the days before
weigh-in to "make weight".  What corporate executive has not thought of
stuffing the distribution channels with dubious sales in order to "make
quarterly earnings" projections.

In risk management we are not immune.  CDO's and their effect on Basle II
numbers immediately comes to mind.  The magic of CDOs were that they could
almost overnight turn a bank's ratios from crap to golden – or at least
according to Basle II.  On the flip side, there were the investment managers
buying the CDOs to make their investment numbers and their portfolio
mathematics look good.  Did anyone really think that some of the crazier CDO
structures were any more reasonable than a 79-0 soccer score?

Common sense cannot be regulated – unfortunately.  It seems that the
powers that be only have the imagination to regulate numbers, and when the
risk is being run by the numbers, prudent common sense and reasonableness
almost always loses. 

Meanwhile, I bet if my teammates and I tried, we could have let the other
team score 80 goals that day.  And being 14-year-old boys out to impress
girls I am sure they would have been only too happy to do so. 

Risk, Uncertainty, Surprises

 

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


In our overly regimented, legalistic and regulated world, we tend to become
overly fond of and dependent on labels.  This is not entirely inappropriate
as labels convey meaning, both explicitly and implicitly.  Different words,
meaning the same thing can convey very different meanings depending on the
context, the speaker and especially the reader / listener.

In risk management two words or labels arise again and again; risk and
uncertainty.  Often they are used interchangeably.  Amongst the more highly
educated (but not necessarily the more intelligent) the words are carefully
segregated with risk being those events that can be assigned a given
probability distribution while uncertainty is strictly reserved for events
that cannot be characterized by a probability distribution.  This
distinction however generally only leads to discussions that border on the
purely philosophical about measurement theories.

Perhaps it is time to add a third label to the risk lexicon, namely
surprises.   Perhaps risk management should become surprise management, and
Chief Risk Officers should become Chief Surprise Officers.  Admit it –
this simple change of words totally and instantaneously changed your view of
risk management didn't it?  In fact, it probably brought on a chuckle and
a thought such as "we already are the department of surprise
management". 

Now that you have had your laugh, is it really that silly or farcical of an
idea?  It gets rid of the practical false dichotomy between the words risk
and uncertainty. (I will admit that the mathematical dichotomy is real and
useful.)  However it would also change how everyone thinks about risk
management – and that change just might be more practical, efficient and
better in the long run.  Take the idea up with your CSO. 

Gardens Not Buildings

 

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

*/FOLLOW US ON TWITTER [1]/*

I am going to steal yet another idea from Seth Godin.  (I get my ideas and
inspiration from wherever I can – not a bad mindset for risk managers to
adopt).  Last week, Mr. Godin posted a blog called Gardens Not Buildings. 
The link is here. 
http://sethgodin.typepad.com/seths_blog/2013/07/gardens-not-buildings.html
[2]

Paraphrasing the article, Godin compares the engineering and rigidity that
goes into a creating a building, while a garden grows, evolves and develops a
personality over time.

I believe that in risk management we are way too focused on building what we
foolishly and misguidedly hope is permanent buildings of risk processes,
procedures and regulations.  In contrast I believe it is much more
productive to let risk management procedures be more organic – much like
gardens.

Buildings collapse, gardens don't.


[1]
http://twitter.com/intent/follow?original_referer=https://twitter.com/about/resources/buttons&region=follow_link&screen_name=RSDsolutions&tw_p=followbutton&variant=2.0
[2]
http://sethgodin.typepad.com/seths_blog/2013/07/gardens-not-buildings.html

Risk Equals Happy

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

A friend of mind with a very sharp and eclectic mind (the best type of
friends to have) sent me an article from the July issue of Psychology
Today.  The article entitled "What Happy People Do Differently [1]" was
authored by Robert Biswas-Diener and Todd Kashdan.

One of the key points of the article is that happy people explore outside of
their comfort zones.  In other words, there are "real rewards of
risk".  While we can have a debate about whether or not corporations are
psychologically capable of happiness (or even what that would mean), I
believe the central tenet of the article holds for corporations as well as
individuals; namely there are real benefits to taking risks.

Anyone who reads my blogs regularly knows that I am a huge proponent of risk
as being viewed as two sided – that is there is good risk and bad risk, and
risk management involves managing both types of risk.  With this mindset
there are real benefits of risk.

Individuals who do not take chances tend to live boring and unhappy lives –
basically the premise of the Psychology Today article.  Likewise
organizations that do not take risks produce boring and relatively mediocre
profits. 

However there may be another even more significant (bad) risk lurking within
corporations that do not want to take risks – namely the risk that risk
averse corporations attract unhappy risk averse employees.


[1]
http://www.psychologytoday.com/articles/201306/what-happy-people-do-differently

What or Why Risk Training

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

Risk training is obviously a hot topic at the moment.  It has certainly kept
us busy here at RSD Solutions.  Before you design your next risk training
interaction I would like to point out a few of the differences between
"What" focus training, and "Why" focus training.

"What" focused training tells the participants what has to be done, while
"Why" focused training gets participants to understand the reasons for
why.

A "What" focus to training produces participants who are capable of doing
things.  A "Why" focus produces participants who can do things but also
understand why.  Understanding why to do things provides the knowledge to
know when the rules or procedures will be broken – and there will be times
when a rule or procedure will need to be broken.

A "What" focus is not engaging.  A "Why" focus engages the
participants.  Engaged participants become engaged employees.  Engaged
employees have several benefits including more buy in to risk culture and
strategy and a ground level source of risk improvement ideas to name just two
benefits.

A "What" focus produces knowledge.  A "Why" focus produces wisdom.

A "What" focus produces stasis.  A "Why" focus produces risk growth.

So what's your training focus?