Friday, February 27, 2015
All Are Not Equal
All risks are not equal. Some opportunities have bigger potential than
others, and some losses are potentially more disastrous than others. Treating all risks with the equal amount of
time, energy and effort is not smart, nor is it effective. All are not equal.
Wednesday, February 25, 2015
Risk Curation
We live in a time when we are awash with information. The internet, our Twitter feeds, our email,
our Facebook, our Linked-In feeds etc. etc. bombard us with a non-stop
information torrent. So much so that we
intentionally ignore so much of our information flow that we actually might be
receiving less information than we did in the pre-internet / pre-social media
era. Additionally so much of the
information we receive is incomplete, biased, misleading, half-baked or simply
wrong. Many media pundits argue that the
new role of respected media is not news reporting but news curation – sorting
the wheat from the chaff and presenting the stream of information in the most
useful manner possible.
In today’s business environment, the manager is also awash in an
information torrent. In certain
industries such as financial services, a lot of the flow is risk based. Without proper curation the manager is at
risk for actually being less informed about the relevant risks of their unit
than they were thirty years ago when such information was much rarer and much
harder to sort. Thus a key role of the
risk department is to act as the curator of risk information.
Risk information is key to good risk management,
but it is the right information at the right time that is necessary.
Monday, February 23, 2015
Man and Machine
Big data is everywhere, and risk management is
no exception. Big data in a nutshell is
nothing more than allowing computers to crunch numbers to see patterns that
might escape the human. It is data
analysis that may or may not have been done by a human, now being done by
computer. Of course lots of other tasks
formerly done by humans are being done by computers or by robots. Indeed, many tasks in risk management are now
done at least partially by computer – for instance credit analysis, fraud
detection, human resources, stress testing, etc. etc. This is not news, but the spread of computers
into white-collar tasks is quite threatening to many. However it must be realized, particularly in
risk management, that there are things that a human can do, that a machine
cannot do. It is not man or machine, but
man and machine.
Friday, February 20, 2015
Warning Pollution
Almost everyone has heard the story of the boy who cried wolf. The Sheppard boy repeatedly cries “wolf” and
each time the townsfolk come running to save the herd from the wolf – but each
time it is a false alarm and there is no wolf.
Finally a wolf does attack the sheep herd, but no one comes when the boy
cries “wolf”. The townsfolk are tired of
the false warnings and thus do not take the “wolf” signal seriously.
I believe a similar thing may be happening with
risk warnings. For both legal and
regulatory reasons there are so many risk warnings in our daily lives that we
simply ignore all of the warnings just as the townsfolk started to ignore the
cries of “wolf” from the Sheppard boy.
Warning pollution is real, and like all forms of pollution it is not
good.
Wednesday, February 18, 2015
Connecting the Dots
Steve Jobs once famously said that “you cannot connect the dots
going forward”. Every risk manager at
some level understands this. The fact
that the future unfolds in an unpredictable manner is in some way the reason
that the discipline of risk management exists.
It is however a lot easier to connect the dots going backwards – but
this exercise has some hidden traps.
Connecting the dots on what happened is a way to deconstruct a risk
event and learn from it. This (to coin a
phrase from the ‘90s Martha Stewart) is a “good thing”. However it often becomes a bad thing for
several reasons.
Firstly, we are often shallow in connecting the dots going
backwards. We find a few major
correlations, and we assume these correlations are the cause. In reality it is often the much more subtle
and more hidden catalysts that are the loosely connected dots that as risk
managers (and regulators) we need to be looking for and learning from. The reality is that we often superficially
take the first few major dot connections as our answers. Risk is much more nuanced than that. (I will leave the obvious issue of
correlation not necessarily being causation out of the discussion for now.)
Secondly we assume that the same dots will exist going forward. This is frequently incorrect. The dots, and their connections going forward
are usually not the same. Risks and how
they arise evolve, adapt and change. The
same dots will not necessarily produce the same connections and in turn produce
the same results. The effect is
compounded when we include the fact that we likely did too superficial of a job
analyzing the dot connections from the previous risk event – as discussed in
the previous paragraph.
Risk management is not an “if-then” management
exercise. Fortunately, or unfortunately
(depending on your point of view), risk management is not a connect-the-dots coloring
book. (I really enjoyed connect-the-dot
coloring books as a kid.)
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