Posted tagged ‘Plural Rationalities’

Risk Culture gets the Blame

March 18, 2014

Poor Risk Culture has been often blamed for some of the headline corporate failures of the past several years.  Regulators and rating agencies have spoken out about what they would suggest as important elements of a strong risk culture and the following 10 elements all show up on more than one of those lists:

1.      Risk Governance – involvement of the board in risk management

2.      Risk Appetite – clear statement of the risk that the organization would be willing to accept

3.      Compensation – incentive compensation does not conflict with goals of risk management

4.      Tone at the Top – board and top management are publically vocal in support of risk management

5.      Accountability – Individuals are held accountable for violations of risk limits

6.      Challenge – it is acceptable to publically disagree with risk assessments

7.      Risk Organization – individuals are assigned specific roles to facilitate the risk management program, including a lead risk officer

8.      Broad communication /participation in RM – risk management is everyone’s job and everyone knows what is happening

9.      RM Linked to strategy – risk management program is consistent with company strategy and planning considers risk information

10.    Separate Measurement and Management of risk – no one assesses their own performance regarding risk and risk management

Those are all good things for a firm to do to make it more likely for their risk management to succeed, but this list hardly makes up a Risk Culture.

Crowd

The latest WillisWire post in the ERM Practices series talks about Risk Culture from the perspective of the fundamental beliefs of the people in the organization about risk.

And RISKVIEWS has made over 50 posts about various aspects of risk culture.

Risk Culture Posts in RISKVIEWS

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Planning for Risk in 2014

January 2, 2014

Barry Ritholtz provides some outstanding predictions for 2014.

His point, that we cannot predict the future, is well made.

But equally true, we need to have some view of the future in order to continue.  The position that Ritholtz takes, that the future cannot be predicted is actually one of the four Risk Beliefs that is described by the Theory of Plural Rationality.  If you hold that disbelief about any of your risks, then your best strategy is to make many smaller commitments.

The other three beliefs are:

  • Risk is predictable and it will be very high.  Need to be extremely careful. Probably shouldn’t plan to grow at all.
  • Risk is predictable and it will be low.  Time to expand.
  • Risk is predictable and it will be moderate.  Careful and limited risk taking and expansion can work well.

If you are in the risk business, then you choose a strategy for each risk.  Hopefully, you will be doing that AFTER you have collected information about the trajectory of each major risk.

However, some management teams will start from the results that they “must have” to determine their strategy.

If you have done that you should look now at your belief for each risk.  Where you see a mismatch between your belief and your strategy for a risk, you should start making contingency plans.  Otherwise, you will be in for a Surprise.

For example, if you planned to grow at a substantial pace, you need to experience a low risk environment.  Otherwise, your growth is likely to be a very mixed blessing.  (see the Surprise article for details of the surprises that can be experienced by every mismatch between the actual risk environment and the risk strategy)

 

Collective Approaches to Risk in Business: An Introduction to Plural Rationality Theory

December 18, 2013

New Paper Published by the NAAJ
http://www.tandfonline.com/doi/abs/10.1080/10920277.2013.847781#preview

This article initiates a discussion regarding Plural Rationality Theory, which began to be used as a tool for understanding risk 40 years ago in the field of social anthropology. This theory is now widely applied and can provide a powerful paradigm to understand group behaviors. The theory has only recently been utilized in business and finance, where it provides insights into perceptions of risk and the dynamics of firms and markets. Plural Rationality Theory highlights four competing views of risk with corresponding strategies applied in four distinct risk environments. We explain how these rival perspectives are evident on all levels, from roles within organizations to macro level economics. The theory is introduced and the concepts are applied with business terms and examples such as company strategy, where the theory has a particularly strong impact on risk management patterns. The principles are also shown to have been evident in the run up to—and the reactions after—the 2008 financial crisis. Traditional “risk management” is shown to align with only one of these four views of risk, and the consequences of that singular view are discussed. Additional changes needed to make risk management more comprehensive, widely acceptable, and successful are introduced.

Co-Author is Elijah Bush, author of German Muslim Converts: Exploring Patterns of Islamic Integration.

Rational Adaptability is needed for risk management success

October 28, 2013

There is no single approach to risk management that will work for all risks nor, for any one risk, is there any one approach to risk management that will work for all times.  Rational Adaptability is the strategy of altering your approach to risk management with the changes in the risk environment.

Willis Re execs Dave Ingram and Alice Underwood have teamed with anthropologist Michael Thompson to produce a series of articles that discuss the four risk environments and four risk management strategies that are linked to four risk attitudes that are adapted from anthropology work from the 1980’s.

The four risk attitudes are: Pragmatists, who believe that the world is uncertain and unpredictable; Conservators, whose world belief is of peril and high risk; Maximizers, who see the world as low-risk and fundamentally self-correcting; and Managers, whose world is moderately risky, but not too risky for firms that are guided properly.

We have been living through an Uncertain risk environment where the optimal risk management strategy is Diversification of risks.  The height of the Financial Crisis was, of course, a Bust risk environment where the optimal strategy was Loss Controlling.  Prior to the crisis, some sectors were experiencing a Boom risk environment where Risk Trading was the best strategy.  And the long Moderate environment that preceded the boom for many years resulted in many companies adopting a Risk Steering strategy to optimize risk and reward.

These ideas were presented by Alice, Dave and Mike at two conferences in Europe in 2012 and published as a series of six articles on the InsuranceERM webzine.  Those six articles have been compiled into a single report by InsuranceERM that is now available from their website.

This is just the latest in a long series of work on this topic (and the most comprehensive to date).  Please see https://riskviews.wordpress.com/plural-rationalities/ for a comprehensive look at this work over the past several years.

New Riskviews Wiki – Actuarial Applications of Plural Rationality

October 13, 2012

For several years now, I have been working with a small group of people to explore and write about the ideas of Plural Rationality and how it can be used in the field of risk management.  We have presented these ideas at multiple actuarial meetings around the world and published articles in a number of places.  You may be aware of this.

Recently, I recruited two new actuaries to this work and their reaction has been very favorable as they work on this and thereby learn more.  The theory of plural rationality has fairly strong explanatory powers.  They are helping to find new insights in a field that I know little about.

That experience has inspired me to invite all of you to join this effort.

To that end, I have created a wiki for development of actuarial discussions of plural rationality.

https://riskviewswiki-actuarialapplicatifpluralrationality.pbworks.com

The list below are the pages/discussion topics that have been created so far.  The Background page includes links to most of the places where you can find the work that has been done to date on this by Michael, Thompson, Alice Underwood and I.  The others are blank pages that are example of possible discussion topics.  Other discussion topics are of course possible.

(This is all free, but to access, you will need to set up a pbworks account. I am not selling pbworks.  I just happen to like how it works. And it seems to let me do this for free.)

I believe that I need to send you a personal invitation to join the Riskviews network on pbworks so that you can set up the account.  So if you are interested, please send an email to  daveingram@optonline.net.  Feel free to forward this to anyone that you feel might have an interest.  This discussion is not necessarily restricted to actuaries.

  • Background on Plural Rationality
  • Implications for Risk Management
  • Implications for Risk Measurement
  • Implications for Catastrophe Risk measurement and management
  • Implications for Pensions
  • Implications for Equity Linked Life Insurance and Annuities
  • Implications for Mutual Insurance
  • Implications for Solvency II

If you are someone who has no idea what I am talking about and want to look at the Plural Rationality background materials without joining pbworks, you can see it at Plural Rationality and ERM page here on the Riskviews blog.

Dave Ingram

The Tea Party as a Conservator Group

August 12, 2011

The Tea Party movement in the US is well known for its lack of formal leadership and its insistence on absolute purity of ideas.

The Tea Party is an excellent example of a Conservator group in the updated terminology of Plural Rationalities.

The Conservators have the view that the world is an extremely risky place.  That deviation from the norm will cause disaster.  In fact, this Conservator group believes that the deviation has already taken place and that it is extremely important to put things back in place.

To Conservator groups it is extremely important to maintain agreement by everyone in the group to the group ideas.  They are much more likely to expel a member of the group than to allow for diversity of thought. In addition, these groups tend to an egalitarian group structure.  There is very low hierarchy in these groups.  Individual groups tend to be small.  Slight diversity of ideas tend to result in the creation of splinter groups.

The Conservator type group is actually called Egalitarians by the Anthropologists.  Their group ideas are inspired by the perception that the world is experiencing very adverse times.  In this perception they are linked to reality when such times actually exist.  Their group will gain adherents in such times as others notice the adversity and some to believe as well.

The Conservator group strategy is to seek to pull back and control risk taking so that they can keep (or in this case return to) safety.

Ironically, the Environmental movement is another contemporary example of a Conservator group.  Their approach to the world is very similar to the Tea Party in their belief that things are out of kilter and that a major pulling back is needed to get things to be safe.  They also have the same leanings toward purity of thinking and splinter groups.

The Theory of Plural Rationalities suggests that people and groups of people will always exist who have the Conservator point of view.  But when the environment aligns better with their dire view, they will attract more adherents and possibly even dominance.

When they dominate a society, there will be relatively little growth and investment.  They tend to want to keep things the same.  New ideas are not favored.  During the reign of the Conservators, excess capacity will doubtless build up which will eventually be put to use and create relative prosperity undermining the message of the Conservators.
Eventually, people will notice that some other group that is not as fixed in its approach will be doing better.  People will drift away from the Conservators to the other groups and it will lose influence.  Those other groups will be taking one of three approaches:

  • Some will be making smaller investments like the Conservators, but will be widely diversified in their approach, unlike the tightly focused Conservators.  Eventually one of their many investments will take off.  These are the Pragmatists and they are best suited for the Uncertain environment.
  • Some will be the entrepreneurs who will charge ahead with new ideas and new ventures anyway.  They are most likely to put the excess capacity to use and create the prosperity.  They are the Maximizers.  Their approach is best suited for Boom times.
  • Some will be looking for the large organizations, the governments and the large corporations to save the economy.  They favor a guided approach to innovation and growth and investments.  They are the Managers.  Their approach is best suited to Moderate times.  They hope to extend those moderate times forever through careful management of the economy.

The Tea Party is not a purely Conservator group.  Some of their main ideas are Maximizer ideas.  They are directly opposed to both the Conservator and Manager strands of the Democratic party.  The Conservator strands of the Democrats are the people who are very much in favor of helping the needy and the labor movement.  The Manager strands of the party are the big government folks who believe that the world can be made a better place by government actions.  The Republican party also has had Manager strands with its historical support of big business and the military who are both strongly Manager groups.


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