Archive for February 2019

Risk Intelligence II

February 28, 2019

Somehow it worked.

Several psychologists stated that economists were rational and those who didn’t know what economists knew were irrational.

They collected data on how irrational folks are and analyzed that data and grouped it and gave cute names to various groups.

But I think that you could do the same thing with long division. Certainly with calculus. Compare answers of rubes on the sidewalk to math PhD s on a bunch of math questions and how well do you think the rubes would do?

Some of the questions that the psychologists asked were about risk. They proved that folks who rely solely on their gut to make decisions about risk were not very good at it.

I am sure that no-one with any Risk Intelligence would have bet against that finding.

Because Risk Intelligence consists of more than just trusting your gut. It also requires education regarding the best practices for risk management and risk assessment along with stories of how well (and sometimes ill) intentioned business managers went wrong with risk. It also requires careful analysis. Often statistical analysis. Analysis that is usually not particularly intuitive even with experience.

But Risk Intelligence still needs a well developed gut. Because history doesn’t repeat, analysis always requires simplification and assumptions to fill out a model where data is insufficient.

Only with all of Education, Experience and Analysis is Risk Intelligence achievable and even then it is not guaranteed.

And in addition, Education, Experience and Analysis are the cure for the irrational biases found by the psychologists. I would bet that the psychologists systematically excluded any responses from a person with Risk Intelligence. That would have invalidated their investigation.

Their conclusion could have been that many of us need basic financial and risk education, better understanding of how to accumulate helpful experiences and some basic analytical skills. Not as much fun as a long list of cutely names biases, but much more helpful.

Risk Intelligence I

February 24, 2019

Risk Intelligence is what you need to make astute decisions about risks that confront you.

With Risk Intelligence you will be able to:

  • know when something is risky
  • know how to systematically determine parameters of risk
  • Assess Danger from a Risk – and not be unduly swayed by Fear of that Risk
  • understand that those parameters do not fully define a risk. They identify a point on a gain and loss continuum
  • identify the handful of risks that make up 90% of the risk profile (key risks)
  • understand the mechanisms that the company uses to maintain a consistent rate of risk for each key risk and Help to make sure that those mechanisms are maintained and only expect that there will be deliberately agreed changes to the rate of risk for any key risk.
  • understand risk/reward analysis and cost/benefit analysis where the trade-offs are often a certain reduction in earnings vs. an uncertain reduction in future losses
  • discern when to trade short term certain gains for longer term uncertain but larger gains under conditions that could be repeated indefinitely for a tangible long term gain.
  • be aware of which risks the company is exploiting because they have the expertise and opportunity to make a good profit for the amount of risk take and are able to notice when the opportunity to exploit has passed.
  • be aware of which risks the company is accepting and carefully managing to achieve a reasonable profit while avoiding unacceptable losses.
  • be aware of the risks that are unavoidable but the create little or no profits and that should be minimized at an acceptable cost.
  • Understand that people are generally optimistic and need to test plans against alternate future scenarios

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