Risk = Probability X Consequences. Really?

“Wall Street thought it had risk all figured out…” should read that they figured out a marketing message given kudos by the number of Phd’s, MBA’s etc. employed by organisations whose appetite for individual/collective wealth and power was enabled by regulatory and credit (rating) regimes that suited the aspirations of politicians ALL at the expense of their citizens (customers) i.e. those that give them the means to function.

Their own greed and inability to continue to control information that exposed it, has been their undoing. Access to INFORMATION has enhanced our knowledge to such an extent that we have been able to recognise the MISINFORMATION that was presented as ‘knowledge and expertise’.

They created and profited from a volitile financial environment that, once globally interconnected, is beyond their control but, for as long as profits can be privatised and losses socialised, they will not suffer…until what has been ‘hidden in plain view’ can no longer be tolerated or sustained.

Time is nearly up.

Artificial Intuition

(image from www.impactlab.net )

Probably the most frequently used definition of risk is this one:

Risk = the Probability of something happening X resulting Cost/Consequences

This definition is flawed because of two fundamental reasons, which the formula itself suggests very eloquently:

1. Estimation of probabilities of future events is very difficult (while it is considerably easier when talking of past events). Rare events have very low probabilities and these are extremely difficult to estimate due to the fact that the sample of available data is very small (what is the probability of an event similar to 9/11?). Since this factor multiplies the “cost” in the above equation it is of paramount importance.

2. Estimation of the costs/consequences of these events. This is most difficult. Even after a catastrophic event it is difficult to estimate the total damage and cost.

However, the most important flaw is hidden and it is conceptual…

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The Last ‘Mystery’ of the Financial Crisis

“As you know, I had difficulties explaining ‘HOW’ we got to those numbers since there is no science behind it,” confesses a high-ranking S&P analyst. “If we are just going to make it up in order to rate deals, then quants [quantitative analysts] are of precious little value,” complains another senior S&P man. “Let’s hope we are all wealthy and retired by the time this house of card[s] falters,” ruminates one more.

Rolling Stone Mobile – Politics – Politics: The Last Mystery of the Financial Crisis.

Gawande:: to err is human [or don’t mess with complexity!]

@atul_gawande by pixbymaia (Photo credit: pixbymaia)

OK, so this isn’t quite what Atul Gawande says in his excellent book, ‘The Checklist Manifesto’ (link to title on Amazon) but, when highly skilled people whom we trust to see us across thousands of miles of open sea in an aircraft or through a critical 6 hour surgery, it may as well be! It is a strikingly similar message to that promoted by Nassim [Black Swan] Taleb and, implicitly, by Ontonix.

I don’t know about you but, if I am going on a transatlantic flight, under the knife or entrusting a lifetime’s worth of savings to an expert, I really don’t care that they may use a checklist to improve their chances of success! Rather that than rely upon a fluffy mascot, lucky bandana or some other such nonsense!

Competitive advantage from new insights on customers, risks and business cycles – Bain & Co.

It isn’t rocket science to figure that, if we keep asking the same questions, using the same metrics and look for familiar patterns in data we won’t get new, better answers or identify new patterns!

Identifying, mapping, monitoring and managing causal relationships is a means by which carriers of financial/insurance risk can seize a considerable competitive advantage…from an informational advantage.

Ontonix enables organisations [insurers] to do just that…in real-time, if required!

So, instead of relying upon attempts to predict the unpredictable and reflexive, post-loss, analysis the opportunity exists for ‘crisis anticipation’. Our experience of working across a wide range of sectors – from healthcare to aviation, automotive and engineering design to banking – is that, our unique analysis can enable effective loss prevention. A, potentially, transformational development for firms involved in insurance risk transfer, investing for future returns or protecting against unknown (or unknowable) future events…so where are the ‘Risk Leaders’?

Domestic terrorists don’t wear pinstripes

Is it just me that is absolutely gobsmacked by this!?

Further evidence, of the lack of consistency and glaring inequalities. OK, we know that Regulators and Legislators see fit to ignore the scale of the crimes perpetrated by these banksters BUT for how much longer can any right-minded citizen stand idly by?

More (costly) regulation won’t change this culture but, CONSTRUCTIVE TRANSPARENCY can. And, in the process, reduce the risks associated with such behaviours.

Political and Financial leaders know that they are playing a very high stakes game and that there is a growing threat that ALL that they hold dear will, as a result of both their actions and inaction, come under threat. Would this go some way to explain the rate at which civil liberties are being stripped away across the Western world? I sincerely hope that such questions or suggestions don’t qualify me as a “domestic terrorist” because, as a mere citizen, anything could happen…

JPMorgan Chase has been sanctioned by US regulators for failures in its risk management operations after it lost more than $6.2 billion on a single credit derivatives trade. The sanctions follow the disclosure of significant losses in a large synthetic credit portfolio that was managed by the CIO. The botched bet – made by UK big fish Bruno Iksil – had managed to wipe out $51 billion in shareholder value before alarm bells started to ring at the bank’s head office in New York. Among other things, the Fed identified deficiencies in risk management oversight, modelling assumptions, audit and finance reporting and escalation to senior management. The OCC further found that the bank’s BSA (bank Secrecy Act) compliance programme had “critical deficiencies” with respect to suspicious activity reporting, monitoring transactions, conducting customer due diligence and risk assessment, and implementing adequate systems of internal controls and independent testing. Despite the criticism, JPMorgan Chase escaped with nothing more than a rap on the knuckles. No fines were levied by the watchdogs and the bank didn’t admit or deny wrongdoing in consenting to the regulatory orders

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