Management by Onside Kick
Many American football fans can recall a game when their team drove the ball 80 or more yards in the waning moments of the game to pull within a touchdown of the team that had been dominating them. Then they call for the on side kick – recover the ball and charge to a win within a few more plays.
But according to NFL stats, that onside kick succeeds only 20% of the time in the waning minutes of the game.
Mid game onside kicks – that are surprises – work 60% of the time.
But mostly it is the successful onside kicks that make the highlights reel. RISKVIEWS guesses that on the highlights those kicks are 80% or more successful.
And if you look back on the games of the teams that make it to the Super Bowl, they probably were successful the few times that they called that play.
What does that mean for risk managers?
Be careful where you get your statistics. Big data is now very popular. Winners use Big Data. So many conclude that it will give better indications. But make sure that your data inputs are not from highlight reels or from the records of the best year for a company.
Many firms use default data collected by rating agencies for example to parameterize their credit models. But the rating agencies would point out that the data is from rated companies only. This makes little difference for rated Bonds. There the bonds are rated from issue to maturity or default. But if you want to build a default model of insurers or reinsurers then you need to know that many insurers and some reinsurers will drop their rating if it falls below a level where it hurts their business. So ratings transition statistics for insurers are more like the highlight reels below a certain level.
Some models of dynamic hedging strategies were in effect taking the mid game success rates and assuming that they would apply in bad times. But like the onside kick, things worked very different.
So realize that a business strategy and especially a risk mitigation strategy may work differently when things have gone all a mess.
And an onside kick is nothing more than putting the ball in play and praying that something good will happen.
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