Visions from the Blind
On the same theme as Chief Ignorance Officer I was inspired by a review I just read of the book Invisible by Hughes de Montalembert. That book tells the autobiography of an artist who is blinded 30 years earlier. I was struck by the repeated references to things that the blind man was able to learn or notice that might not have been noticed by the sighted.
So take that idea to risk management and you end up with a very simple but potentially highly powerful exercize. The idea would be to see what you could learn about one of your risks if you totally exclude the information and anaylysis that you usually use – your eyesight.
If you rely totally on rating agency opinions for credit analysis, try to see whether you could reach similar information by a process that does not refer in any way to the ratings.
If you use a one year market consistent economic capital calculation to determine your capital adequacy, could you come to a similar conclusion about your security totally independently from the information and calculations of that model?
If you develop your underwriting risk view based upon your firm’s experience over the past 15 years, what sort of assumptions would you need to apply to industry history to get to your opinion about your firm’s risk?
Goldman Sachs famously decided to start hedging their sub prime exposures because an alternate analysis of their experience was just not as consistent with their primary information as it had been in the past. Notice that they started out with a track record of previous such exercizes and an expectation for the degree of deviation from their different sources. It is often the case with this alternate analysis that the absolute outcome might not be significant , but divergence in trend might be the key information that can lead to an avoidance of major loss.
So think about how to put the blinders on to your usual way of looking at your risks.Explore posts in the same categories: Black Swan, Financial Crisis, Risk Identification, Risk Learning comment below, or link to this permanent URL from your own site.