Scapegoats or Systems - What Hinders Effective Risk Management

We can read: we only learn from turbulences (caused by many things including failures) … but if it comes to real failures, management theory is often forgotten.

Risk management is about helping optimize risk - in terms of economic value. There are different types: market risk, credit risk, liquidity risk, …

Often operational risk is included, but IMO, it is not a risk, it is a danger - that does not mean it cannot be managed. In its core it is the danger that a "system" behaves unexpected and with unintended consequences.

Failure: models and management

What management does in an organization when something goes wrong?

Quant finance work is characterized by the interplay of users with technologies. Consequently the model of an error causation can be person- or system-oriented.

A bad reaction is to hunt for a scapegoat - trace back to team members, who might have caused the failure and blame them. However, the person approach seem to remain the dominate tradition. Blaming individuals seem to be emotionally more satisfying?

The better approach is to take the systemic view and analyze what can be done to avoid them.

Antifragility again

Remember, an antifragile becomes stronger with added stress. In a systemic view failures are seen as consequences rather than causes. It is wrong to assume we cannot change conditions under which humans work.

One of the systemic dangers in quant risk management are model and method traps - and their avoidance cannot always be automated by verification and validation processes.

System defences are very difficult and often fragile themselves.

But there is a better way

Knowhow Men

The is the title of a commentary about UnRisk in the July, 2014 issue of the Wilmott Magazine. Its editor, Dan Tudball, interviewed Andreas Binder and Michael Aichinger.
In the usual scheme of things, when a solution provider has developed a successful set of applications atop a proprietary engine, the layers of obfuscation and opacity over how that engine does what it does generally become thicker and thicker as time goes by. As a firm makes its mark and carves out a market niche for itself, marketing speak multiplies in inverse proportion to openness ...
the article starts.

Why we made the decision for an open information policy is the essence of this three page article. In short, transparency is indispensable, it is fun, and it pays back.

In our understanding, we think for you is outdated. For the better way, we have established the UnRisk Academy. For the system approach of failure management and more.

This post is inspired by this post of Eight to Late.