John Kay:: don’t blame luck when your models misfire

There are still legions of smart people recruited into FS to be put to work on building models that attempt to predict the future…WHY???

We will succeed in managing financial risk better only when we come to recognise the limitations of formal modelling. Control of risk is almost entirely a matter of management competence, well-crafted incentives, robust structures and systems, and simplicity and transparency of design

Basically, according to this quote, what we need to do is, almost exactly the opposite to what we have done for so many years!

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Krawcheck on banking complexity:: The Complexity of the Simplicity Solution

After so long it is encouraging to know that complexity in banking is, at least, getting a more frequent airing by others! But, unlike the headline in the recent FT article, we (at Ontonix) don’t believe that “fighting complexity is futile“…far from it! Einstein knew of the rewards available to those who “reached” the simplicity beyond complexity. The scale of the problems created by the excesses of our financial system should tell us that the quest is only futile if banks DON’T adopt a culture and the tools that facilitate “transformation”.

Joining the dots between the ongoing banking crisis and the enlightened output from, such as, Andy Haldane resolves nothing until we act upon what we have learnt! We can’t afford to overlook the obvious shortcomings in Risk Management, Regulatory failures and abandonment of Corporate Governance.

But SURELY, as the author has identified some of the current problems, it can only be a matter of time before sufficient number of enlightened, influential, individuals reach their “flipping points“, act to influence and educate the crowd  – at Ontonix we are doing our utmost to aid this process [refer following video] – so we reach a “tipping point” and effect a, long overdue, paradigm shift.

Krawcheck offers some basic ideas for “paring back the complexity risk” in banking. She argues for looking at the bank’s overall risk profile; for compensating bank executives based on the bank’s risk profile (in terms of debt and equity); paying out dividends as a percentage of earnings; reforming the credit agencies (sigh); and urging boards to worry about booming, not struggling, businesses. (The last advice makes sense, but if we need to remind boards of that, we’re really screwed.) All this is very nice, but very broad — and given, yes, the complexity of banking, it’s a little hard to see the kind of effect it would have.

In fact, except for her first notion, I’m not sure it would do much to either rein in complexity or too-big-to-fail. The devil here is in the details. How would you calculate the “overall risk profile”? Is this a mark-to-market process, in which daily, weekly or monthly numbers are generated, like the much abused and suspect value-at-risk? How, given the enormous complexity, would these metrics be generated — and by whom?

If JPMorgan Chase & Co.’s big ugly trade managed to escape the bank’s internal risk management operation — not to say regulators — how would that have found its reflection in the bank’s overall risk number? It’s a rule: It’s the stuff we don’t know, or don’t want to know, that tends to kill us. And just remember: We’ve had a devil of a time just trying to provide guidelines on bank capital. What makes anyone think calculating an overall risk profile would be easier?

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Hopefully the following video will go some way to answering critical questions and paving the way to a, less volatile, sustainable future…

The new model leaders –

I have previously referred to the danger of “micro managing macro issues” and the impact of the, morally corrupt, culture of “Irresponsible Capitalism” upon fragile structures from the Industrial era…but I don’t have the same gravitas as the Founder of the World Economic Forum, so am unsurprised when people question my conclusions! Read more of this post

A wise man knows one thing – the limits of his knowledge

If you haven’t come across Prof John Kay before but “get” the following, I can recommend more of his writings. He is a regular contributor to FT and wrote an excellent book with invaluable lessons on modern business life: Obliquity

…I have been looking at some of the models people use, in both the public and private sectors to predict events.

The models share a common approach. They pose the question: “How would we make our decision if we had complete knowledge of the world?” With such information you might make a detailed assessment drawing together many different pieces of relevant information on matters such as costs, benefits, and consequences.

But little of this knowledge exists. So you make the missing data up. You assume the future will be like the past, or you extrapolate a trend. Whatever you do, no cell on the spreadsheet may be left unfilled. If necessary, you put a finger in the air.

John Kay – A wise man knows one thing – the limits of his knowledge.

If we now know what we “don’t know”, we should already know that, underestimating the unknown (unknowable?!) impact of future (unforeseen or unforeseeable) events, based upon assumptions, carries unknown dangers.

Organizations need to learn to distinguish between the kinds of problems that can be handled with traditional perspectives, where precise prediction and solution is possible, and the kinds of problems associated with unavoidable complexity.

Entrainment of thinking is an ever-present danger.

Banking: decline of mature markets – fulfilling the prophecy

Whilst Western eyes are scanning other BRIC markets and wondering what they can do to “weasel” their way out of a predicament of their own making, others (no more credible than they) are adopting a strategy popularised by Warren Buffett:

“Be fearful when others are greedy and greedy when others are fearful”

More than 20 years after Soviet tanks and soldiers pulled out of then-Czechoslovakiain Eastern Europe, Russian influence is on the rise in what was once its imperial backyard. Where guns and bullets failed, rubles are succeeding.

Local governments are selling off state assets to plug gaping budgetary holes as the global financial crisis bites. Western corporations are tightening belts and selling off some assets in the region. Stepping into the void are eager Russian businessmen, some backed by the Kremlin, as money trumps lingering suspicions from decades of Moscow-led Communism.


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