The biggest Risk is that the rules keep changing
RISKVIEWS played the board game Risk Legacy with the family yesterday. We were playing for the 8th time. This game is a version of the board game Risk where the rules are changed by the players after each time playing the game. Most often, the winner is the person who most quickly adapts to the new rules. Once the other players see how the rules can be exploited, they can adapt to defend against that particular strategy, but at the same time, the rules have changed again, presenting a new way to win.
This game provides a brilliant metaphor for the real world and the problems faced by business and risk managers in constantly having to adapt both to avoid losing and to find the path to winning. The biggest risk is that the rules keep changing. But unlike the game, where the changes are public and happen only once per game, in the real world, the changes to the rules are often hidden and can happen at any time.
Regulators are forced to follow a path very much like the Risk Legacy game of making public changes on a clear timetable, but competitors can change their prices or their products or their distribution strategy at any time. Customers can change their behaviors, sometimes drastically, most often gradually without notice. Even the weather seems to change, but we are not really sure how much.
Meanwhile, risk managers have been forced into a universe of their own design with the movement towards heavy metal complex risk models. Those models are most often based upon the premise that when it comes to risk, things will not change. That the future will be much like the past and in fact, that even inquiring about changes may be difficult and may therefore be discouraged due to limited resources.
But risk can be thought of as the tail of the cat. The exact path of the cat is unpredictable. The rules for what a cat is trying to accomplish at any point in time keep changing. Not constantly changing, but changing nonetheless without warning. So imagine trying to model the path of the cat. Now shift to the tail of the cat representing the risk. The tail has a much wider and more unpredictable path than the body of the cat.
That is not to suggest that the path of the tail (the risk) is wildly unpredictable. But keeping up with the tail requires much more than simply extrapolating the path of the cat from the recent past. It requires keeping up with the ever changing path of the cat. And the tail movement will often represent the possibilities for changes in the future path.
Some risk models and risk management programs are created with recognition of the likelihood that the rules will change, sometimes even between the time that the model assumptions are set and when the model results are presented. In those programs, the models are valued for their insights into the nature of risk, but of the risk as it was in the recent past. And with recognition that the risk that will be will be somewhat different because the rules will change.