Robert May

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

Follow us on Twitter

Robert May is a leading biologist who introduced the use of mathematical models and more specifically complexity into the field of biology. In my work of writing about and consulting on complexity, I have often come across the work of Dr. May, even though finance and risk management is about as far away from biology as any two fields can be.

Robert May should be required reading for risk managers.  Dr. May’s work into theoretical ecology and biodiversity shares a surprising amount of commonality with risk management; in particular the focus on modeling within the context of complexity.

His article titled “Uses and Abuses of Mathematics in Biology”[1] should be required reading for anyone who deals with risk models. Loosely paraphrasing one of the arguments in the article, May laments the fact that the proliferation and ready access to computer models has allowed those who do not understand the mathematics to use models without an intuitive understanding of the mathematics, nor an understanding of the weaknesses and assumptions of the mathematics that underlie the computer models.  In his words, “I think this can be worrying.”  I too think it is worrying.

[1] Robert M. May, “Uses and Abuses of Mathematics in Biology”, Science, Vol. 303, February 6, 2004

Nuclear Missile Testing and Cheating

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

Follow us on Twitter

By now you have heard about the test cheating scandal by members of the U.S. Air Force who were caught cheating on their mandatory tests for operating nuclear missiles. As a university professor I am aware that cheating is basically a fact of tests and exams.  From the U.S. Air Force example it appears that the phenomenon occurs in all places and under all situations.

All risk managers have of course been tested on various subjects at some stage of their life; through K – 12, college, university, trade school, or perhaps even through taking one of the risk management certification programs such as GARP or PRMIA.  Undoubtedly some of them may have cheated once, twice or perhaps systematically at one time or another.

Cheating on a test or an exam is of course not correct.  However, is cheating on a test any worse than cheating on an analysis being done for senior managers, regulatory reports or other stakeholders of the firm?  I am not talking about lying about the results, or cribbing or copying the results of someone else. I am instead talking about not doing the due diligence required to make sure the numbers are accurate. I am talking about perhaps assuming a given distribution for a calculation when another distribution would give truer results.  Perhaps it is deliberately not asking the right risk questions.  These are all forms of cheating, and there are many others.

Cheating is not confined to test taking.

The Most Important Training Question

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

(Repost of blog from September 9, 2009)

Follow us on Twitter

I often get requests for training seminars where the client has a long list of topics that they want covered.  These lists will often be accompanied by varying degrees of details on the current knowledge level of the participants as well as their current job functions.  Clients that having training departments will also have suggestions as to timing, format and pre-seminar and post-seminar activities.  While this data is most welcomed, it misses the most important training question of all:  What is it that you want the seminar participants to do after the training that they could not, or would not do before?

When confronted with this question, training managers (or more often than not now with the parsing of training departments it will be the line manager) often stumble with their words.  They simply do not know what the change in action is that they want to have occur because of the seminar.  They have a well defined body of knowledge that they believe needs to be conveyed, but the exact business reasons why the participants need this knowledge is generally extremely hard for them to articulate.

Often when I actually conduct the seminar I realize that many of the participants already have a fairly comprehensive knowledge – or at least a working knowledge of the material to be covered.  The issue therefore is not knowledge per se, but performing actions that utilize that knowledge.  There are many reasons why employees may know something yet not act on it.  Self-esteem, confidence, not understanding the rationale behind the knowledge, not understanding how important acting on the knowledge is for the company or unit to achieve its objective, or simply that it is much easier to act on other knowledge by default or through habit.

This brings home the point that professional training should be about changing actions, changing confidence and changing the ability of the seminar participant in helping the organization to succeed.  Successful training is only 1 part technical knowledge.  It is 10 parts action, 10 parts rationale behind the action, 20 parts confidence and motivation in taking that action and 30 parts having the right objectives for the training program in the first place.

One training manager that I once worked with strongly questioned this line of reasoning, until I asked the question: “Do you want employees who know things, or employees who do things?”  That question brought it all home.

The next time you call us (or another training firm for that manner) be prepared to have a dialogue about the answer to the question, “What is it that you want the seminar participants to do after the training that they could not, or would not do before?”  You will be glad you did.

Domestic Risk Management

Domestic Risk Management

By Stephen McPhie, CA
Partner, RSD Solutions Inc.

(Slightly late repost of blog from Valentine’s Day, 2010)

Valentines Day is an appropriate time to ponder on some aspects of personal risk management, especially for those of us who have spouses or partners.  Actually, if some thought had not gone into Valentines Day before now, the risks of arguments, domestic splits, divorce or even being told that your partner has a headache increases dramatically.

A basic domestic risk-hedging programme could include ordering flowers.  The addition of a present adds extra cost to the programme but can provide a better hedge.  Booking a table at an expensive restaurant is again more expensive but can provide the most effective protection against domestic risk.  Each of these provides a progressively more expensive risk management programme and the one chosen would depend upon a number of factors including risk appetite, past experience, etc.

Of course, the risk management programme can be poorly conceived or implemented.  If, for example, the present is a book entitled “How to Stop Snoring” or “10 Steps To A Cleaner House” or the dinner is not at a romantic venue with subdued lighting, but at the local sports bar when an important game is on, then the risk management programme can significantly increase risk.  Of course, the same risk programme can work for good or bad depending on the circumstances.  So in our sports bar example, if it is a female taking her boyfriend there she could gain a whole lot of brownie points, whereas the other way round, the boyfriend may well end up wearing a pitcher of beer and going home alone.

Looking at the downside, a hedge may also include an escape plan.  I am told that France is a much friendlier jurisdiction then England for the male side of a relationship in a divorce.  (There are some people I am hoping won’t be reading this!!!)  You only have to spend a night in France to claim residence and give the courts jurisdiction … and assuming you file first!

All the above considerations are completely applicable in a corporate context and show that a risk management programme is individual to every company and should be developed and implemented according to specific circumstances.

How do you handle your domestic risk management?

For my part, I intend to rush out to the store immediately I stop typing.

Relevance

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

Follow us on Twitter

I am known as a bit of a thorn in the side of some of my academic colleagues.  The issue is that I believe that a lot of the research (and teaching) that is being done in finance, and in risk management in particular is being done more for the benefit of the researchers than for the benefit of society.  I will defend pure / theoretical / academic research until the end of the world.  However when almost ALL of the research is purely academic then I think there is a problem.

One of my colleagues is on a task force looking at the relevance of research.  Knowing my arguments for more relevant research he out of the blue popped into my office a short time ago to ask what MY definition of relevant research is.  I have to humbly admit that I did not have a ready-made answer for him, and indeed the question caught me totally off-guard.   My answer was along the lines of “research that has a 50% probability of being implemented in some way by a manager within five years”.  I was not totally satisfied with that answer, but it was the best I could do on the spot.  I have however thought about the question a fair bit over the week or so since my colleague approached me with the question.

Upon further reflection I would like to change my response to “research that attempts to answer a question that a manger should be asking”.  This response however also raises issues.  One major issue is that many managers do not know the questions they should be asking.  Like lawyers, managers tend to ask the questions that they already know the answer to, rather than the questions they suspect might not have an implementable answer.  Another related issue with this definition is that the answer to most great management (and risk management) problems is “maybe”. 

Management, and risk management in particular is a messy and complex field.  Academics however – with their need to publish or perish – are much better suited to answering complicated questions than complex questions.  Research results of “maybe” do not get published, and thus do not get rewarded.  Additionally, frequently only complicated questions have readily available data, while with complex questions the data is often missing, nebulous or fuzzy at best.

The best questions of risk management deal with unknown unknowns, or risk culture, or why people act in irrational ways, or why the best laid plans of mice and men fail.  These are great questions that have so far proven to have not so great answers.  However that does not mean that we should not keep asking those questions and trying to find “better answers”, even if we cannot find “answers”.

Attitude

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

Follow us on Twitter

I fly a fair bit, and being a Canadian I am somewhat limited to three different airlines that serve my local airport.  On one airline the staff seem to be truly happy about working.  They are friendly, courteous, and almost always seem to have smiles on their faces.  On the second airline the staff is quite professional, but really do not have an attitude one way or the other – they certainly do not have a negative attitude, but neither do they have a positive friendly attitude.  In regards to the third airline, the attitude is generally (with some notable exceptions) very negative.  The joke is that the company motto is “We’re not happy until you’re not happy”.  It is really quite shocking the difference.

In risk management we talk a lot about culture – but rarely do we talk about attitude.  Creating a culture is a long and difficult task.  Perhaps it is best to start with something simple and basic – such as attitude.  Creating an environment where people have a positive attitude about risk, and the risk management systems in place just might be a better way to think about changing a company’s risk culture. 

Scale

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

Follow us on Twitter

It is a beautiful March day – cool but clear.  I am lucky enough to live on a lake, and I write this blog I am watching a group of kids play a game of hockey on the lake.  Sometimes it is really great to be a Canadian!

The lake is about the size of 10 football fields.  By Canadian standards not a very large lake, but still it is a heck of a lot larger than a typical hockey rink.  Just as a lark, the kids have set up goalposts at each end of the lake and are playing a game of hockey that uses the entire lake surface as a hockey rink.  Probably one of the largest unofficial hockey rinks ever – although I assume these kids are not the first to realize the joy (and fatigue) of skating and playing hockey on such a huge rink.

Watching the kids trying to play hockey on such a big “arena” got me thinking of scale.  Hockey was not meant to played on such a large surface – as these kids are finding out as their passes stop half-way to their intended targets.  While playing with an incorrect scale is fun for pick-up hockey, it is not fun or effective for a risk management system.  Thus the question – is your risk management system and ideas big enough for your organization?  Is your risk management too large, or is it too small?  Either way it doesn’t fit.

Blogs

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

Follow us on Twitter

I enjoy writing these blogs – I hope you enjoy reading them.  I try to keep them short and breezy.  Over the past four years, I have written approximately 500 blogs.  That is a chunk of ideas – and undoubtedly not all of them were high quality ideas.  The point is however, as one of my friends put it, “one you start, you got to keep feeding the beast!”

Feeding the blog beast means coming up with something to write about.  For risk management that is quite easy most of the time.  Risk management is such a rich and developing field that there are many different ideas to put a few words to word processor on.  However it is easy to get stuck in a rut, and get stuck on one or two ideas.  It sometimes takes work to come up with “fresh” ideas.  But that is also true of risk management.  As risk managers we also tend to get stuck in ruts, using one technique or concept for every issue that comes along.  As risk managers we got to “keep feeding the beast” with fresh ideas for managing and exploiting risk.  We cannot be satisfied with what has been written (developed); we must always be thinking of new and fresh ideas.

Living Wills

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

Follow us on Twitter

If you are of a certain age you likely have a will.  Financial institutions in many countries now also have a version of a will; a living will.  Assuming you are relatively healthy, both mentally and physically, then I suspect you have no idea of how you are going to die.  Likewise, a financial institution, assuming it is relatively healthy and sound also has no idea how it will cease to exist.  If you knew how you were going to die, you would undertake actions to mitigate the chances of dying.  Likewise, even the most ineptly run financial institution will manage itself to decrease the probably of going out of business. 

How a person dies is either natural or through some type of unforeseeable accident.  It is the same for financial institutions (or any other type of business organization for that matter); they die naturally through the normal course of business, or they go out of business through a set of unforeseeable circumstances.

Having a will does not change your chance of dying.  A financial institution having a will does not change its probability of failing.  A will is a tool for after you die, not before.  Let’s stop pretending otherwise. 

There is one major difference between a (living) will for an individual and a living will for a financial institution.  A (living) will for both a person and for a financial institution is intended to create an orderly windup.  In the case of a person, a (living) will is of great service to the family members and the executor of an estate.  However I am highly confident that whatever series of events that occur that cause a major financial institution to fail, it will almost certainly make the living will of that institution a farcical useless artifact.

Laplace

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

Follow us on Twitter

Pierre Simon Laplace was a physicist, astronomer, mathematician and as we will discuss a philosopher who lived from 1749 – 1827.  Many readers of this blog will of course know of Laplace through their study of Laplace transforms in university.

For the general public, Laplace is probably better known for his thought (which I am paraphrasing) that, if he knew the position and momentum of every particular on earth, and if he had enough calculating power, then he would be able to completely determine the future of the world.

That is a very profound statement, and it brings up all sorts of questions about free-will and in part is responsible for Einstein’s famous comment that (again paraphrasing) “God does not place dice”.

I believe that philosophy is best left to discussions in bars while you are waiting for the game to start.  However as you start your day, the thought of Laplace’s does give you pause.  My point for this blog – a blog supposedly about risk management – is does Laplace’s comment give us pause in risk?  In other words, aren’t many of us implicitly going around trying to manage risk so as to be able to completely determine the future outcomes of the organization (or at least the downside outcomes)?  Are not the regulators also implicitly making the same assumptions (having the dream of a predetermined and thus risk free world) with the imposition of each new regulation?  Don’t most risk managers dream of a world like Nirvana where every risk can be pre-determined and controlled?

Perhaps it is time we explicitly checked what we think about Laplace’s conjecture a bit more before we set our risk management goals.