“Complexity reduction” is one of 6 Key Areas for Banking Industry

Ernst & Young recently released “CFO Report: Bank Capital Management in Uncertain Times.” The report covers, as stated, capital management strategies, but it also delves into the areas of risk management getting the most attention at global banks. Since the financial crisis, banks recognize that the quantitative risk models many had relied upon are no longer adequate. The survey found that CFOs, chief risk officers and the organizations that they are a part of are coming together to focus on six key areas of risk management:

Reassessment of business strategy
Analysis and implementation of capital optimization opportunities
Monitoring and revision of capital adequacy goals
Reduction of the complexity of business operations and rationalization of legal entity structure
Improvements in reporting
Improvements in data quality and systems
  1. Reassessment of business strategy
  2. Analysis and implementation of capital optimization opportunities
  3. Monitoring and revision of capital adequacy goals
  4. Reduction of the complexity of business operations and rationalization of legal entity structure
  5. Improvements in reporting
  6. Improvements in data quality and systems

Greedy, lazy and stuck in a rut!: the link between corporate culture and a sick society

Heart disease is a major killer in modern (particularly Western) society. Modern lifestyles – lack of exercise, poor diet, stress – are, undoubtedly, factors and the outward signs MAY, eventually, become apparent.

Not too many years ago we “got smart”, we learned about cholesterol. What it was were it came from and the damage it did to the body by clogging vital pathways.

Processed foods – those that have been modified by us to extract maximum return – are high in “bad” cholesterol [LDL & Lp(a)], affect the performance of the body [system] and do serious, long term, damage.

So, let’s say you are short on energy, fatigued, overweight or unable to perform life’s daily tasks as effectively as you should. You go to your Doctor  tell him/her the symptoms and your version of the truth about lifestyle.


What about if the system “under stress” is your business?

A business is a system, like the human body. It is reliant upon its component parts and its ecosystem (Supply chain) communicating and working interdependently to enable it to perform.

Business systems suffer from their own version of cholesterol…it’s called…COMPLEXITY.

Like the human body a business needs complexity – “natural” complexity is what facilitates system functions – but it too has a threshold. In proximity to “critical complexity” the system becomes unstable, unpredictable and difficult to manage. If you think about it you will recognise that scenario. It can manifest itself as a form of paralysis – too many issues or deadlines and the inability to know which issue needs tackled first – blind panic, or that desire to get as far away as possible!

A business cannot function beyond the point of “critical complexity” without losing functionality. The system fails. Sometimes, as in the case of the collapse of Lehman Brothers, spectacularly: You may recall much talk around the “man-made” complexity of the products and greed that brought about their demise.

The operational effectiveness, robustness [resilience] or overall health of a business cannot be measured from independent KPI’s or by sampling financial data [in accordance with international accounting standards].

What is the yardstick for success?: figures from the previous month or year; benchmarking against competitors

The business is an interdependent system and needs to be viewed as such.

If business units are underperforming it is preferable to know in advance and address issues rather than see it manifest in accounts

Complexity, like cholesterol, is in itself a major source of risk.

If you can’t identify it, you can’t measure and manage it…remember it can be terminal!

The business operates within a its own ecosystem

You want to know that the businesses with whom you deal are “healthy” and to demonstrate your own health

Cholesterol and Complexity are very real threats. We know about and are able to measure both as a result of scientific advancements. So IF you are concerned about falling performance of your business – find out the current level of complexity and, from the data that it generates, about strengths and weaknesses  – or want to know that it can be managed at a safe distance from its point of “critical complexity”  in a tough trading climate PLEASE DON’T waste time and money on a, so called, business health check that doesn’t test for complexity.

I would urge you to ask your Accountant, Risk or Quality Manager (whether in-house or outsourced), Insurance broker or any external Consultants what they are doing to ensure your business is, currently and remains, free from excessive complexity. WHEN they admit that they cannot provide what you need ask them to get in touch with me or do so directly. It will be my pleasure to help.

Whatever you do DON’T DO NOTHING!

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Manage complexity and add 5% to earnings! OK, so don’t take my word for it…

Just about everything you hear about COMPLEXITY is negative and still people look at you like you just tried to sell them a plot on Mars when you talk about the ability to offer, genuinely (that’s right in the original sense of the word not in a marketing sense!), unique solutions.

It does get better though. Because whilst some high profile firms seem intent to scare their customers into parting with some more Consultancy fees…and don’t seem too advanced when it comes to effective solutions, AT Kearney are blazing a trail!

SO, if Ontonix (www.ontonix.com) can’t score major new clients to add to the current impressive list, when firms such as IBM, McKinsey & AT Kearney and “scholars” such as Einstein, Ulrich Beck and Nassim Taleb are IDENTIFYING THE PROBLEM, QUANTIFYING THE FINANCIAL & RISK BENEFITS and can only dream of offering TRIED and TESTED, 100% QUANTITATIVE, SOLUTIONS such as those of ONTONIX…then I reckon a career selling chunks of some far flung planet doesn’t sound so bad after all!!!

Manage complexity and add 5% to earnings! OK, so don’t take my word for it… …80 year old Global Consultancy firm AT Kearney (ATK) say so. ATK appear to have a better understanding of complexity than most. So, I will happily let them tell you that, even by  using the methodology they outline below, they claim that managing complexity will add up to 5% to earnings. I hope that’s got your attention!? Because it gets even better. WE BELIEVE THEM but can’t help but wonder how much more could be achieved if their means of calc … Read More

via A heid full of mince but at least it’s my mince!

Our Fundamental Misunderstanding of Randomness

Having forged neural pathways in my efforts to “understand” complexity, in reading Nassim Taleb’s great book, “Fooled by randomness” and listening intently to, such as, Prof Andrew Lo, this whole issue has really come to fascinate me.

In considering potential applications for our (Ontonix) Complex Systems Management solutions the appreciation of the close relationship between risk, uncertainty and complexity became apparent pretty early on. I probably owe a debt of thanks to Donald Rumsfeld with all his “known knowns” and “known unknowns” mumbo jumbo…at least, at the time, it sounded like the ramblings of a man whose brain had gone into meltdown!

But when your thirst for knowledge touches areas like Systems theory, Complex Adaptive Systems, Chaos theory, Behavioural and Complexity Economics, etc. you really start to understand that no amount of eloquent math of PhD risk-modelling was ever going to form a sound basis for the sheer scale of the financial risks that the Banking sector, knowingly and recklessly took on! They weren’t fooling themselves or the Regulators and their Political masters.

They knew they were too big and too powerful to pay for their failure…but they fooled us…and, apparently, it isn’t really that difficult. Read on:

Humans are fascinated by randomness and yet we fundamentally misunderstand it. One misunderstanding is our belief in the hot hand–the intuition that a short run of consistent, but statistically independent, events is likely to continue. Another is our belief in the gamblers fallacy – the intuition that a short run of consistent events is likely to reverse. Although these two tendencies appear contradictory, they are often explained by the identical mechanism – the representativeness heuristic.

According to a recent study (abstract below), when observing streaks, people appear to make inferences about the characteristics of the agents generating them. For instance, people tend to predict that streaks generated by a non-random agent (such as a basketball player) will continue whereas those generated by a random agent will revert (such as a roulette wheel). When we see someone performing an action consistent with an intention to obtain a specific result (like shooting a three-pointer), we (erroneously) conclude that the person is skilfully guiding that action and therefore controlling the outcome.

From psychology today:

These authors tested this idea with a series of clever experiments and studies. In one experiment, people watched a video of someone flipping a coin. One group was told to focus on the intentions of the coin flipper to understand “what he is trying to accomplish with his tosses.” A second group was told to focus on his actions, “the specific movements of his hands and fingers.”

At various points, the groups made predictions for what the next coin flip would be. For one prediction, the previous 8 tosses involved a random-looking sequence of 4 heads and 4 tails. For a second prediction, 6 of the previous 8 tosses had been heads including a streak of 4 heads in a row. When the sequence was random, people in both groups predicted that the coin would come up heads about half the time. When the sequence ended with a streak, though, people who focused on the person’s intentions predicted that the coin would come up heads 68% of the time, while those who focused on the person’s actions predicted the coin would come up heads 28% of the time. That is, thinking about intentions led people to think the streak would continue, while thinking about the mechanism of the flip led people to think it would end.

In another study, people made predictions about stock prices. They were shown graphs of the performance of some stocks over a two-week period. The critical items in this study were graphs that had trends in the stock price. In one graph, the price of the stock went up consistently over the two week period. Another second graph had a decreasing trend. Participants were asked to predict the next day’s stock price. Unsurprisingly, people shown the increasing trend assumed that the stock would keep going up. People shown the decreasing trend assumed that the stock would keep going down.

However, the authors had participants complete a questionnaire about an individual difference in anthropomorphism. That is, some people have a tendency to give human traits and mental characteristics to inanimate objects, while others do not. Those people who were most likely to think that the stock market has a mind of its own were the ones who were most likely to think that the streak in stock prices would continue. Those people who were most likely to think that the stock market has no intentions were most likely to think that the streak in stock prices would end.

This last study has important implications. In daily life, we must often make predictions about what will happen in complex situations. It is important to recognize those situations in which we have a good causal understanding of the situation and know whether the data we observe are good predictors of future performance and those situations in which the most recent observations are just the outcome of a generally random process. In these situations, we must take some care not to ascribe intentions to processes that are really random.


People can appear inconsistent in their intuitions about sequences of repeated events. Sometimes people believe such sequences will continue (the ‘‘hot hand”), and sometimes people believe they will reverse (the ‘‘gambler’s fallacy”). These contradictory intuitions can be partly explained by considering the perceived intentionality of the agent generating the streak. The intuition that streaks will continue (reverse) should emerge in contexts involving agents that are perceived to be intentional (unintentional), and should be most common among those who are most inclined to attribute intentions to other agents. Four studies support these predictions, identifying both situational and dispositional determinants of the perceived continuity of streaks. Discussion focuses on the foundational nature of intentionality for perceptions of interdependence between events, the relationship between these findings and existing theoretical accounts, and the inverse possibility that people use perceptions of streakiness as a cue for an agent’s intentionality.

For more information, read the Psychology Today Article or the Complete Study.

If you like this article, you’ll probably like How Underdogs Can Win, Can You Lose on Purpose: The Role of Skill and Luck, and Three Common Mistakes on Mean Reversion. I also recommend reading Think Twice and More Than You Know.

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