Simplicity Fails

Usually the maxim KISS (Keep it Simple Stupid) is the way to go.

But in Risk Management, just the opposite is true. If you keep it simple, you will end up being eaten alive.

That is because risk is constantly changing. At any time, your competitors will try to change the game trying to take the better risks and if you keep it simple and stand still, leaving you with the worst risks.

If you keep it simple and focused and identify the ONE MOST IMPORTANT RISK METRIC and focus all of your risk management systems around controlling risk as defined by that one metric, you will eventually end up accumulating more and more of some risk that fails to register under that metric.  See Risk and Light.

The solution is not to get better at being Simple, but to get good at managing complexity.

That means looking at risk through many lenses, and then focusing on the most important aspects of risk for each situation.  That may mean that you will need to have different risk measures for different risks.  Something that is actually the opposite of the thrust of the ERM movement towards the homogenization of risk measurement.  There are clearly benefits of having one common measure of risk that can be applied across all risks, but some folks went too far and abandoned their risk specific metrics in the process.

And there needs to be a process of regularly going back to what your had decided were the most important risk measures and making sure that there had not been some sort of regime change that meant that you should be adding some new risk measure.

So, you should try Simple at your own risk.

It’s simple.  Just pick the important strand.

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One Comment on “Simplicity Fails”

  1. soniajaspal Says:

    Interesting persepctive and a very valid point. Too much focus on a single dashboard over a long period of time, will leave most risks unaddressed.


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