My favorite book of the Bible is Job.  That could have been called the book of WHY.  Everyone throughout the book assumes that there must be an answer and they try out those answers but none seems to fit.

Finally, they get an answer, but it is not the sort of answer that they were looking for.  The answer that they get is something like”you would never understand”.

But the risk manager is always being asked why?  Asked to explain the unexplainable.

David Hackett Fisher advised historians to avoid WHY.  To stick with who, what, when, where  and how.

A why question tends to become a metaphysical question. It is also an imprecise question, for the adverb ‘why’ is slippery and difficult to define. Sometimes it seeks a cause, sometimes a motive, sometimes a reason, sometimes a description, sometimes a process, sometimes a purpose, sometimes a justification.

This list of definitions for the word why is useful to the risk manager however, because often there is no “why” under some definitions, but the other definitions can help to provide a path to an answer that is probably less than satisfactory but better than nothing.

Nothing being the same as the answer “it is still a 1 in 100 event, we were just unlucky”.

If you want the company’s executives to really embrace ERM, then the risk manager needs to have all of these definitions and as many of the answers as humanly possible on hand.  The executive will need the risk manager to provide the words that they can use and feel comfortable lording it over their peers who do not have such a smart risk management department.  They need the words than answer WHY.

The famous quote about risk..

“We were seeing things that were 25-standard deviation moves, several days in a row.”

David Vinar, CFO Goldman Sachs
August 2007

Vinar obviously had someone who did not have the above list of definitions of WHY on hand, he got the S— Happens answer from a math geek.

Executives need to be brought into the Baysian recalibration process.  Each year, the  experience of the year needs to be placed on the scale from the model (as Vinar did above) and the scale then either accepted or rejected.  (Which step Vinar obviously did after making that statement.)

That exercize ought to be a part of every year end wrap up from the risk department.  Their recount of the who, what, when, where, how and WHY of the events of the year.

Explore posts in the same categories: Random, Risk Management System


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One Comment on “Why?”

  1. Robert Arvanitis Says:

    The notion of a 25 standard deviation event is nonsense. The universe has not existed long enough for such an event to take place.

    It has no meaning mathematically. Rather it is a token of anxiety, just like saying “We never expected THIS to happen!”

    Two thoughts on statistics. First as good Bayesians, we must balance the opposing goals of credibility (volume of data) and relevance (recency of data).

    Second, we must transition in a consistent and replicable way between beliefs. Suppose I flip a coin heads several times. Anyone with a first year course in probability is taught to say we do not “expect” a tail; we are not “due” a tail after several flips. They are taught to persist in the hypothesis the coin is fair. But once I get to 100 heads (as in Stoppard’s play “Rosenkrantz and Guildenstern Are Dead”) I must conclude the coin is not fair.

    So the interesting question is how we are to shift our view from “fair” to “biased,” as the data accumulates.

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