What’s the Truth?

There has always been an issue with TRUTH with regard to risk.  At least there is when dealing with SOME PEOPLE. 

The risk analyst prepares a report about a proposal that shows the new proposal in a bad light.  The business person who is the champion of the proposal questions the TRUTH of the matter.  An unprepared analyst can easily get picked apart by this sort of attack.  If it becomes a true showdown between the business person and the analyst, in many companies, the business person can find a way to shed enough doubt on the TRUTH of the situation to win the day. 

The preparation needed by the analyst is to understand that there is more than one TRUTH to the matter of risk.  I can think of at least four points of view.  In addition, there are many, many different angles and approaches to evaluating risk.  And since risk analysis is about the future, there is no ONE TRUTH.  The preparation needed is to understand ALL of the points of view as well many of the different angles and approaches to analysis of risk. 

The four points of view are:

  1. Mean Reversion – things will have their ups and downs but those will cancel out and this will be very profitable. 
  2. History Repeats – we can understand risk just fine by looking at the past. 
  3. Impending Disaster – anything you can imagine, I can imagine something worse.
  4. Unpredictable – we can’t know the future so why bother trying. 

Each point of view will have totally different beliefs about the TRUTH of a risk evaluation.  You will not win an argument with someone who has one belief by marshalling facts and analysis from one of the other beliefs.  And most confusing of all, each of these beliefs is actually the TRUTH at some point in time. 

For periods of time, the world does act in a mean reverting manner.  When it does, make sure that you are buying on the dips. 

Other times, things do bounce along within a range of ups and downs that are consistent with some part of the historical record.  Careful risk taking is in order then. 

And as we saw in the fall of 2008 in the financial markets there are times when every day you wake up and wish you had sold out of your risk positions yesterday. 

But right now, things are pretty unpredictable with major ups and downs coming with very little notice.  Volatility is again far above historical ranges.  Best to keep your exposures small and spread out. 

So understand that with regard to RISK, TRUTH is not quite so easy to pin down. 

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Explore posts in the same categories: Cultural Theory of Risk, Risk, Risk Learning, Volatility

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One Comment on “What’s the Truth?”

  1. Jason Jones Says:

    I disagree partly with this particular notion of points of view about the truth. Yes, it’s probably true that we all exhibit the 4 biases (points of view) mentioned. It can also be very helpful for a risk analyst to anticipate the biases of his or her audience in order to prepare for a presentation.

    However, a risk analyst will still get shot down and be labeled as “unprepared” or “out of touch” in a company where risk is not taken seriously and all the power is in the hands of business units who are not concerned with risk. A risk management unit that is unable to stand up and be heard should focus on gaining credibility and greater influence through the support of top management and the board of directors. If a risk manager tries but can’t get this credibility and influence, it might be time to look for a new job at a company where risk is treated seriously.


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