Posted tagged ‘Views of Risk’

2013 Year in Riskviews – Report from WordPress

January 1, 2014

The stats helper monkeys prepared a 2013 annual report for this blog.

Here’s an excerpt:

The concert hall at the Sydney Opera House holds 2,700 people. This blog was viewed about 37,000 times in 2013. If it were a concert at Sydney Opera House, it would take about 14 sold-out performances for that many people to see it.

Click here to see the complete report.

What happens if there are no new posts?

April 1, 2013

There was no plan for March to be a test of no new posts.  But when it got into the 20’s and there were no new posts, the experiment started to sound like a good idea.

So what happened?

  • 2000 Visitors
  • 3200 hits
  • Those totals exceed December, January and February, when there were 18 new posts
  • 160 different pages or posts were viewed
  • 1200 of the hits were to the Risk Management Quotes page and post
  • The most popular topical post was “Getting Started with a Risk Management career

Some say “Less is More”.  In this case, None has been More.  What a surprise.

Math Wins

November 7, 2012

The emerging US election results are showing that the more math based people like Nate Silver were extremely accurate in predicting the outcome of the election and the GUT based people were totally off base. See NYT.

This is the same comparison that psychologists have been doing for 50 years between clinical judgement and statistical reasoning.  See The Evolution of Thinking.

The pundits making GUT predictions seem to be totally fooled by the Confirmation Bias.  They only gave any credibility to information that matched their preferred conclusion.

Risk managers need to take care.

This does not mean that the statistical risk models must be right.

That is because risk models are fundamentally based upon opinions.  They are fundamentally a tool of the Confirmation Bias.

Risk models are not models of “what is” as much as they are models of “what will be”.  They always reflect one or more biases:

  • A bias that the future is predictable.  That has not particularly been the case for the past 4 years or so.  The future has been decidedly unpredictable.  Uncertain is the word that we read over and over.  Companies with highly complex models have had less of an advantage over companies without than during the Great Moderation.
  • The bias that the future will be just like the past.  This bias manifested itself as a totally disastrous blindness to the risks that led to the Great Recession.  Or the Fukishima  Reactor disaster.  It was thought that something could not happen if it has not happened before.
  • The bias that the market reflects all available information.  The market value of sub prime mortgage CDO in 2006 when mortgage defaults first started happening just does not confirm this bias.  And at least half of all corporate defaults happen in a cliff, not a gradual decline.
  • The bias that things will be much worse than everyone else thinks.  (This is the position of folks like Nassim Taleb and Nouriel Roubini.  They can predict disaster every week and be right occasionally.  But this is not a useful position for risk managers to take in general.  Chicken Little was right, but just once.

So risk managers need to be careful about taking too much comfort from the win for statistics in the Presidential race.

Where in the World?

May 11, 2012

WordPress has recently added a feature that shows where the hits to the Riskviews blog are coming from.  This captures views of the blog since late February, 2012 – just a few months so far.  But there is a pretty wide spread of viewers.

Riskviews is totally facinated at how this media allows for such a wide audience and is humbled that people from so many places have seen fit to visit. 

The top 20 countries in terms of total number of hits are the following. (WordPress does not seem to allow monitoring the much more useful “Unique Visitors”.)

Thank you everyone for your kind attention.  Let it be known that Riskviews was never intended to be the platform for only one voice.  Anyone who has an interest in expressing their views, once or regularly is welcome. 

Just leave a comment to this post and we will discuss.

Diversity and Resilience

September 19, 2011

Can’t we all just learn to “Get it Right”?

Just picture a ship with a large flat deck and thousands of passengers on the deck. The boat lists to one side and the passengers scurry to the other side to avoid going over the edge in the side that is dipping. Guess what happens? The boat now lists to the other side. Stabilizing the boat requires that everyone is spread about the entire deck. But since we do not necessarily know the exact spots where everyone needs to stand, some moving around makes sense. Just as long as everyone does not start moving together.

The world we live in is a much more complex and dynamic system than a ship at sea. We definitely do not know what is the safest course of action for everyone to take. We do know what hasn’t worked. We suspect that some of the things that we thought did work in the past were actually not good ideas. We do not know how to get the world to go backwards in time to when things were working best. In fact, they weren’t working best for someone then anyway.

Diversity is the most sensible approach when we do not know what will work. With a diversified approach it is quite possible that some will be doing the exact wrong thing, but at the same time, some will be doing the best thing for what comes next.

Only if we are certain of what will come next can we be sure to pick the best course. When too many people pick any single course of action, however, there often are unintended consequences.
Never before had mortgage loans in the US all gone down together, but when everyone started to increase the amount of leverage in the mortgage system, the leverage itself became the cause of massive correlation.

Ecological systems that are more diverse are more resilient. Human systems are the same.

60,000 Hits and Counting

July 14, 2011

Sometime in April, Riskviews experienced its 50,000th hit.   In July, the 60,000th hit.

Many thanks to all who have looked at our efforts.

There have been almost 400 posts as well as more than 20 pages.  That is an average of almost 4 posts per week for the past two years.  Besides Riskviews, there have been posts from about 10 others, including the three “regulars”.  Riskviews is always open to others to write posts.  Especially if they express a different opinion from Riskviews.  (Riskviews finds the current practice whereby everyone only attends to opinions that they agree with to be totally intellectually stupefying.  Riskview would much prefer someone to disagree in a well reasoned discussion than to hear ideas repeated over and over.)

One of the most interesting things about the blog is that people keep reading older posts.  Only a few are time sensitive.  For example, here is the traffic for the 2nd Quarter 2011.  Almost 10,000 hits in that time.  Some of these posts are two years old now.  The “Home Page” indicates that people hit the front page of the blog, rather than on a particular post.  They were greeted there by the most recent post.

Home page 1,673 hits

Risk Management Quotes 1,299

Lightning or Lightning Bug 1,101

Best Risk Management Quotes 1,000

Risk Management Failures 446

Risk Adjusted Performance Measures 284

Timeline of the Global Financial Crisis 192

Liquidity Risk Management for a Bank 145

Lucas Fayne Highly Recommends this Blog 113

COSO & ISO 31000 & ERM for Insurers 105

GFC 2008 94

Beware the Risk Management Entertainment Systems 84

The Cost of Risk Management 83

Imminent Risk – Employee Turnover 82

Risk Management Success 80

Chief Risk Officers in the News 77

Plural Rationalities and ERM 77

Integrating Risk Capacity and Business Strategy 73

When your Parachute Doesn’t Open 68

GFC 2007 67

Identifying Risks 66

Actuarial Risk Management Volunteer Opportunities 66

Why the valuation of RMBS holdings needed changing 54

Thanks so much for your time and attention!


Bet they do not believe in preparing for the future

June 6, 2011

The New York Times uses the word “bet” extremely frequently. In almost every situation where they are describing someone making a choice about the future, they describe that choice as “betting” on a particular outcome.

It seems that in the world view, someone cannot possibly make a careful, sober choice of course of action.  They can only “bet” on one outcome or another.

Riskviews noticed this when reading the nth story about a financial firm.  Of course, in the NYT language ALL hedge activity is betting.  Even if a firm is already long a risk, if they short that same exact risk to offset their long position, then they are described as “betting” against the risk that they were previously long.

Of course, if you had simply retained your long position and it either gained or lost money, then your “bet” would have been either a winner or a loser.

, via Wikimedia Commons”]In terms of Plural Rationalities, that means that the NYT has a purely PRAGMATIST point of view towards risk.  A PRAGMATIST believes that no one knows the future so any decision about the future is exactly the same as a bet on the spin of a roulette wheel, a gamble.  If you do not believe me, go to their website and do a search on the word “bet”.  You will be amazed at how many times it comes up and you will see that they are always using it to describe these choice about the future.

Now Plural Rationalities suggests that there are three other points of view about the future and risk in the future:

  • Maximizers – believe that things are self correcting so if you keep your head there is little risk in the long run.
  • Conservators – believe that there is a great deal of risk so you should keep away from taking very much risk
  • Managers – who believe that there is a moderate amount of risk and if you are careful, you can take risks and get ahead

That a major voice in our country has gone over to the Pragmatist point of view is a sign of the times.  Things have been very uncertain for several years now.  It is very difficult to tell which way the economy is going.  So being a Pragmatist may just be their temporary reaction to the environment.

When things get more predictable, perhaps they will shift their point of view to that of the Manager.  And over time, as the Managers show more and more success, they may take up the viewpoint of the Maximizer as the next bubble forms somewhere.  Which makes way for the Conservator viewpoint as the bubble bursts.

And so it goes.

Is it Better to Be Lucky than Smart?

November 8, 2010

It certainly is cheaper and easier.  But is it BETTER?

The main difference between lucky and smart is that smart is more likely to be able to repeat than luck.

But I think that there are two different types of smart, and one is much better than the other.

  • The first type of smart is able to discern patterns and trends.  This type of smart can do momentum trading.  They figure out what works in this phase of the cycle of the part of the world that they are in and they discern how to take advantage of one aspect of the trend.
  • The second type of smart is able to discern not just the trend, but they can see that the trend will not last.  So they can plan for the change in trend.  This type of smart is adaptable.
  • The lucky see nor care about trends or changes in trends.  What they choose works.  Some of the lucky are able to convince themselves and those around them that their “gut” can really pick out the right answers.  Those are the dangerous lucky.

If you are led by the lucky, your firm might fail at any time.  The formerly lucky CEO will not have a clue as to why they failed. Over time, they will have relied on their gut more and more and their success will get them more and more authority and autonomy.  People forget that if all business decisions were random coin tosses, someone will guess the right toss 10 times in a row with nothing more than luck behind their string.

If you are led by the Momentum leader, your firm will thrive as long as the wave that they identified keeps going.  In some cases, the leader and the firm come to believe that the trend that you follow IS the way that they world will be forever.  More and more of the company becomes dependent on the assumption that the trend continues.  When the trend fails, the company will falter or fail.  If enough people and enough firms have been following that same trend, the entire economy might falter.  If a trend last long enough, then it is quite likely that more and more people and firms will notice the trend and start to work on the assumption that the trend will continue.

But if you are working in a firm with an adaptable leader, then the firm will not do as well as peers during the peak of the trend.  Your firm will not be putting all of your eggs into the basket of trend immortality.  Your firm will be looking around for things that will work even if the trend changes.  Your firm will have the resilience to weather the change in trend and perhaps some business activity planned that will work even in a new environment.  Your firm will be working smart towards the long term.

So is it better to be lucky than smart?  Not in the long run, not in my mind.

Surprise, Surprise 2

April 19, 2010

At the ERM Symposium, Michael Thompson presented the Surprise Matrix.  Several people asked for copies, so here it is…

There are 16 possibilities.  The rows represent the expectations based upon the risk attitude.

The Pragmatists expect things to be unsettled.  They can be surprised by a recession, where things are consistently bad, a boom where they are consistently good and by normal markets with moderate volatility.  THey are expecting high volatility and unpredictability.

The Conservators expect a recession anr are surprised by the other three environments.

The Maximizers expect a boom and the Managers expect a normal market.

By the way, both neo classical economics and ERM are based upon the managerial mind set.  So you can see how they will be surprised.

Visions of Risk

October 5, 2009

How do you see risk?

One of the most difficult issues for many risk managers is the fact that people do not all see risk the same way.  No matter how hard they try, they cannot get some people to take risk management seriously.  On the other hand some people are eager to eliminate all risk.  Why cannot people just see risk the way that Enterprise Risk Managers have learned to see it?

1.  Do you see risk as something that could lead to severe problems, but if treated properly using well developed risk management techniques, then it can be controlled?

2.  Do you see risk as something that we have almost too much of – if we take any more risk then we will suffer dire consequences?  We need to work to lessen the risk that we are taking at all costs.

3.  Do you think that risk comes and goes, but in the end it all works out?  That periods of risk and loss are always followed by periods of low risk and large gains, so that over the cycle, it all works out.

4.  Or do you think that risk is unpredictable, that it is almost impossible to tell whether risks will turn into losses, so it is best not to bother with risk management?

Those are four views of risk that you probably have seen in your life and work.  As a risk manager, you need to figure out how to work with all four views, because there is little likelihood that you will convert everyone over to your view of risk.

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