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.

Ontonix QCM Blog

Nik-Wallenda-tightroping-over-Niagara-Falls-1cv324b (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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Is Risk Management a Source of Risk


See on Scoop.itComplexity & Resilience

If you have risk function, however, that fully understands the business model, the deployment of its operational strategy, the sector the business operates in and the macro-economic and socio-political environment in which it operates, then they will be able to provide risk information that is relevant to the business, and can be understood by the business.

David G Wilson‘s insight:

‘Knowledge’ that fails to distinguish between practises that are based upon sound theory and those that rely upon flawed models and assumption-based modelling, do not lead to understanding but to feedback loops of unintended consequences…patterns and correlations of our own making!

Unidentified sources of risk and ill-informed (albeit well-intentioned) efforts to manage without UNDERSTANDING ‘causal relationships‘ has the opposite of the desired effect…

…unmanaged risk does not dissipate but is a source of systemic risk, mis-managed, it adds complexity is amplified through the business’ interdependencies and interactions, feeding-back as volatility and adding to uncertainty.

‘Conventional wisdom’ (or herd mentality) based upon assumptions of knowledge, can/does impair our ability to understand and address issues at source.

Before we had the tools to increase our knowledge we were ignorant but, to have the tools and not use them is dangerous and costly ineptitude!:

‘Corporate Latency’ is a significant source of, reducible, exposure in every domain and, unless it is better managed, we cannot build resilient systems or create ecosystems that can claim to be truly sustainable.

See on ontonix.blogspot.it

Is it Possible to Make Predictions?: don’t ask an Actuary or statistician


Probability and Measure
Probability and Measure (Photo credit: John-Morgan)

I don’t consider myself particularly clever but I understand that, when it comes to matters of finance and insurance, we CANNOT predict the future. So, why is it that extremely clever, highly educated, people don’t appear to understand OR are prepared to feign ignorance?

“…contemporary “predictive machinery” is based on statistics – looking back in time, building some model of what has actually happened, extrapolating into the future. The concept of probability plays a central role here. Bertrand Russell is known to have said, back in 1929, that “probability is the most important concept in modern science, especially as nobody has the slightest notion what it means”. In fact, probability is not a physical entity and it is not subjected to any laws in the strict scientific meaning. As a matter of fact, there are no laws of probability. If a future event will take place, it will do so irrespective of the probability that we may have attached to it. If an extremely  unlikely event will happen, it’s probability of occurrence is already 100%”

via Ontonix S.r.l.: Is it Possible to Make Predictions?.

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Complexity, risk, uncertainty and change


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Business management, particularly for those intent upon ‘change’ or responsible for managing exposures, needs a rigorous, objective, measurement of the endogenous properties (complexity) that enables the functionality from which (through interactions with exogenous parties) the business generates the revenues that sustain it in changing and turbulent economic times.

“Complexity increases cost and decreases flexibility — often in unforeseen ways — and also tends to decrease stability,”….

Peter Leukert, CIO of Commerzbank

It is the number, nature and integrity of dynamic, multi-scalar, interactions that are the sources of strength (enabling performance greater than the sum of the parts). The ability to distinguish and respond to ‘signals’, that maintain the variety, effectiveness and agility of the complex system, from the ‘noise’ of flawed metrics, self-serving culture, hierarchical structure (silos), skewed incentives – of an unsustainable, failed or failing, model (reliant upon  assumption, reflexive, subjective, statistical analysis and prediction) that has its foundation in flawed (linear) economic thinking.

We won’t get different or better answers while we keep on asking the same questions.

For meaningful change to occur and to be sustained requires a rigorous justification, sufficient to counter financial projections that satisfy the goals of C-level short-termism that are detrimental to the stability and long term health of the business.

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The 7 Element OEM System: Breaking the Vicious Complexity Cycle


CxU=FOrganizations often use different names in different areas for what are essentially the same controls addressing the same Causes of Failure. For instance, processes such as Process Hazard Analysis (PHA), Hazard and Operability Study (HAZOP), Process Failure Modes and Effect Analysis (PFMEA), Equipment Criticality Ranking, risk registers, risk “bow-ties”, and other similar tools are all designed to address the same common Cause of Failure – failure to identify and assess risk. Implementing multiple variations of the same tool in response to poor performance or incidents drives organizational and process complexity.

http://www.wilsonperumal.com/blog/the-7-element-operational-excellence-management-system-breaking-the-viscious-complexity-cycle-2/

Good thinking, sound advice but the wrong starting point! Read more of this post