Showing posts with label risk. Show all posts
Showing posts with label risk. Show all posts
Monday, 7 December 2009
A rare sight
Watching the mill stream on Sunday in Wiltshire I noticed that something was making ripples through the water. I then saw the tail of an animal as it made its way across the spit of land that divides the mill stream from the mill race which, with the volume of water escaping ,was a mini Niagara and next thing a large otter surfaced and then dived into the turbulent mill race. Quite a special sight as there are probaly less than 2000 otters in England. Clearly in terms of managing the hazards of its territory the otter is very canny. The downfall in its numbers come from human risks which it can do nothing about. I became a devoted otter protector in a trice.
Friday, 24 April 2009
Bulk of the passengers
There has been a great deal of comment recently about the Ryanair proposal, following a poll of their passengers,to charge very fat people extra for flying if they overlap their seat Unfortunately this is not turning into the public relations disaster they deserve for pandering to their passengers' prejudice. They are getting publicity and not many are criticising them.
However their ploy is doubly cynical because not only are fat people an easy target, but also, as was explained on the BBC this morning, there is a perfectly well known example of how to manage this risk sensitively. South West Airlines in the US indicate that if you think you might not fit into a seat then you should consider buying the one next to you. In the event of the plane not being full then South West refund the cost of the extra ticket.
South West's approach is ethical and compassionate and a good example of thinking about the risks from the point of view of not just the majority but also of those unfortunate not to fit the seat space. They exhibit far better risk management than Ryanair.
However their ploy is doubly cynical because not only are fat people an easy target, but also, as was explained on the BBC this morning, there is a perfectly well known example of how to manage this risk sensitively. South West Airlines in the US indicate that if you think you might not fit into a seat then you should consider buying the one next to you. In the event of the plane not being full then South West refund the cost of the extra ticket.
South West's approach is ethical and compassionate and a good example of thinking about the risks from the point of view of not just the majority but also of those unfortunate not to fit the seat space. They exhibit far better risk management than Ryanair.
Wednesday, 1 October 2008
Spreading the risk
Here's a risk management story from Tom Cahill's report on Bloomberg today;
"John James, who runs the Chicago-based firm with $25 million of assets, didn't buy Lehman stock or debt. Instead, his potentially fatal mistake was to rely on the bank's prime brokerage in London, a unit that provides loans, clears trades and handles administrative chores for hedge funds. He's one of dozens of investment managers whose Lehman prime-brokerage accounts were frozen when the company filed for protection from creditors on Sept. 15. "
Never rely on just one provider, if you can help it.
"John James, who runs the Chicago-based firm with $25 million of assets, didn't buy Lehman stock or debt. Instead, his potentially fatal mistake was to rely on the bank's prime brokerage in London, a unit that provides loans, clears trades and handles administrative chores for hedge funds. He's one of dozens of investment managers whose Lehman prime-brokerage accounts were frozen when the company filed for protection from creditors on Sept. 15. "
Never rely on just one provider, if you can help it.
Monday, 22 September 2008
Wholely right
The following extract from Berkshire Hathaway's 2002 Annual Letter to Shareholders deserves the widest possible circulation. Warren Buffett should be required reading for all in the risk business. I have not abbreviated the extract - you need to read the whole section.
Derivatives
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.
Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts.
Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables.
Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.
The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it
seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.
When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it.
But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.
Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.
Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them.
Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.
Of course, both internal and outside auditors review the numbers, but that’s no easy job. For
example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions.
The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then turned out to be truly “mark-to-myth.”
I can assure you that the marking errors in the derivatives business have not been symmetrical.
Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.
Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counterparties tend to build up over time. (At Gen Re Securities, we still have $6.5 billion of receivables, though we’ve been in a liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.
In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the
Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are
fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how we conduct our reinsurance business, and it’s one reason we are exiting derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.
Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large
amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.
On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.
Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market forweeks, was far from a worst-case scenario.
One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes.
Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of
derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activitiesof major banks, the only thing we understand is that we don’t understand how much risk the institution isrunning.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly
multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerousthey are has already permeated the electricity and gas businesses, in which the eruption of major troublescaused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives businesscontinues to expand unchecked. Central banks and governments have so far found no effective way tocontrol, or even monitor, the risks posed by these contracts.
Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our
owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, andthat posture may make us unduly apprehensive about the burgeoning quantities of long-term derivativescontracts and the massive amount of uncollateralized receivables that are growing alongside. In our view,however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Derivatives
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.
Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts.
Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables.
Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.
The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it
seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.
When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it.
But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.
Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.
Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them.
Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.
Of course, both internal and outside auditors review the numbers, but that’s no easy job. For
example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions.
The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then turned out to be truly “mark-to-myth.”
I can assure you that the marking errors in the derivatives business have not been symmetrical.
Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.
Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counterparties tend to build up over time. (At Gen Re Securities, we still have $6.5 billion of receivables, though we’ve been in a liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.
In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the
Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are
fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how we conduct our reinsurance business, and it’s one reason we are exiting derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.
Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large
amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.
On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.
Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market forweeks, was far from a worst-case scenario.
One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes.
Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of
derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activitiesof major banks, the only thing we understand is that we don’t understand how much risk the institution isrunning.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly
multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerousthey are has already permeated the electricity and gas businesses, in which the eruption of major troublescaused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives businesscontinues to expand unchecked. Central banks and governments have so far found no effective way tocontrol, or even monitor, the risks posed by these contracts.
Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our
owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, andthat posture may make us unduly apprehensive about the burgeoning quantities of long-term derivativescontracts and the massive amount of uncollateralized receivables that are growing alongside. In our view,however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Tuesday, 20 May 2008
Two words connected
Shakespeare when we wrote Hamlet had frequent recourse (66 in fact) to hendiadys which is "the expression of an idea by two words connected by 'and' instead of one modifying the other". Examples such as 'law and order',house and home' are hendiadys as well as Shakespeare's own 'sound and fury' and "the book and volume of my brain".
James Shapiro in his book about Shakespeare "1599 " remarks that "when conjoined in this way the nouns begin to oscillate, seeming to qualify each other as much as the term individually modfies." They press on the audience's imagination, stretching the possible meanings and creating new connections.
I think it accounts for the discomfort and excitement that the phrase " risk and reward" provides.
James Shapiro in his book about Shakespeare "1599 " remarks that "when conjoined in this way the nouns begin to oscillate, seeming to qualify each other as much as the term individually modfies." They press on the audience's imagination, stretching the possible meanings and creating new connections.
I think it accounts for the discomfort and excitement that the phrase " risk and reward" provides.
Monday, 19 May 2008
Misleading percentages
"House sales to fall by 40%" is the headline used to attract attention by Yahoo to a report from the Chartered Surveyors.
This is serious, but it is also misleading. When you read on you find that house prices are expected to fall by 5%, whilst house sales plummet 40%.
The immediate downside risk is to the estate agents, the surveyors, and the removal companies.
But sales and prices are easily confused and most will think that the prices are to fall precipitously. They may, but that is not what the report expects.
This is serious, but it is also misleading. When you read on you find that house prices are expected to fall by 5%, whilst house sales plummet 40%.
The immediate downside risk is to the estate agents, the surveyors, and the removal companies.
But sales and prices are easily confused and most will think that the prices are to fall precipitously. They may, but that is not what the report expects.
Wednesday, 7 May 2008
Brown on uncertainty
In our blog of September 11th 2007 we reckoned that Gordon Brown would not call an election at that time and that he might live to regret it.
What has become clearer with every mini crisis is that Brown is very risk averse and that his instinct is always to try to reduce uncertainty to the minimum. This approach worked as Chancellor because he was able to focus on a narrow set of criteria and he had Blair to force through decisions when he did not have enough data for his comfort. As Prime Minister he has to make decisions without enough certainty and he has to accept that sometimes the decisions will go awry.
He is a good example of a manager playing to his strengths even when they are not appropriate for the situation. It is unlikely that he will be able to change and the electorate is starting to see the mismatch.
What has become clearer with every mini crisis is that Brown is very risk averse and that his instinct is always to try to reduce uncertainty to the minimum. This approach worked as Chancellor because he was able to focus on a narrow set of criteria and he had Blair to force through decisions when he did not have enough data for his comfort. As Prime Minister he has to make decisions without enough certainty and he has to accept that sometimes the decisions will go awry.
He is a good example of a manager playing to his strengths even when they are not appropriate for the situation. It is unlikely that he will be able to change and the electorate is starting to see the mismatch.
Monday, 28 April 2008
The Fantods of Risk: Essays on Risk Management
The Fantods of Risk: Essays on Risk Management
By H.Felix Kloman, published by Xlibris. Available from http://www.xlibris.com/ or Amazon http://www.amazon.com/ for $20
Roger Miller,a previous Executive Director of AIRMIC and no slouch with the apposite phrase, once described Felix Kloman to me as having a“luminous mind”.
The range and reading of that mind are on display in Kloman’s latest collection of essays on risk management,esoterically entitled “the Fantods of Risk”. Fantods are either a state of extreme nervousness(the fidgets) or a sudden outpouring of rage ( a fit).
Kloman ,I guess, is more likely to take to his keyboard in a fit ,one perhaps brought on by extreme nervousness as he contemplates the risks facing us and our general incomprehension. He has the seriousness of an Old Testament Prophet, laying down the law ( he likes lists),citing other scriptures including the saintly Peter Bernstein and the blessed John Adams, both known to members for their presentations at the AIRMIC Conference. Kloman is remarkable amongst the IRM membership for being struck dumb when giving their Lecture, an event which he describes in the book, graciously thanking the crisis management of the IRM and the hosts Willis.
He has read very widely and across many disciplines. He is one of the few writers on Risk Management from an insurance background who has become an active member of GARP, the Global Association of Risk Professionals, the financial risk managers who have recently been weighed in the balances and found wanting in their knowledge of risk. He chastises the improvident and the impertinent- including AIRMIC on two occasions in this book for the Partnership agreements which Kloman considers an outrageous conflict of interest – I disagree with him, but I can see why he might get a touch of the fantods when considering the situation from Maine or Connecticut, where he is in residence.
We need more prophets like Kloman, more such writers and thinkers ( not always the same thing of course) and his essays are always illuminating, as Roger said he found the man. They are full of wonderful insights, irritations, the odd haiku, a dash of Monty Python and serious analysis . He makes the study of risk an essential and central activity ,not some obscure calling. He has striven mightily to have the word “risk” accepted as having an upside as well as a downside. It makes you realise that if you look hard enough, within a prophet you may often find a poet.
.
By H.Felix Kloman, published by Xlibris. Available from http://www.xlibris.com/ or Amazon http://www.amazon.com/ for $20
Roger Miller,a previous Executive Director of AIRMIC and no slouch with the apposite phrase, once described Felix Kloman to me as having a“luminous mind”.
The range and reading of that mind are on display in Kloman’s latest collection of essays on risk management,esoterically entitled “the Fantods of Risk”. Fantods are either a state of extreme nervousness(the fidgets) or a sudden outpouring of rage ( a fit).
Kloman ,I guess, is more likely to take to his keyboard in a fit ,one perhaps brought on by extreme nervousness as he contemplates the risks facing us and our general incomprehension. He has the seriousness of an Old Testament Prophet, laying down the law ( he likes lists),citing other scriptures including the saintly Peter Bernstein and the blessed John Adams, both known to members for their presentations at the AIRMIC Conference. Kloman is remarkable amongst the IRM membership for being struck dumb when giving their Lecture, an event which he describes in the book, graciously thanking the crisis management of the IRM and the hosts Willis.
He has read very widely and across many disciplines. He is one of the few writers on Risk Management from an insurance background who has become an active member of GARP, the Global Association of Risk Professionals, the financial risk managers who have recently been weighed in the balances and found wanting in their knowledge of risk. He chastises the improvident and the impertinent- including AIRMIC on two occasions in this book for the Partnership agreements which Kloman considers an outrageous conflict of interest – I disagree with him, but I can see why he might get a touch of the fantods when considering the situation from Maine or Connecticut, where he is in residence.
We need more prophets like Kloman, more such writers and thinkers ( not always the same thing of course) and his essays are always illuminating, as Roger said he found the man. They are full of wonderful insights, irritations, the odd haiku, a dash of Monty Python and serious analysis . He makes the study of risk an essential and central activity ,not some obscure calling. He has striven mightily to have the word “risk” accepted as having an upside as well as a downside. It makes you realise that if you look hard enough, within a prophet you may often find a poet.
.
Sunday, 20 April 2008
Traders,Testosterone and Risk
Research by Dr Coates and Dr Herbert at Cambridge,reported in April 19th Economist, shows that on the days when traders' testosterone levels are high they are more successful. It is not that testosterone rises because they are successful, but that the higher levels are followed by success.
On the other hand when it came to stress, uncertainty was a much bigger driver than failure.
As you might imagine we are only talking male traders here.
There is separate evidence, not in the Economist article, from Spanish scientists, Martinez-Sanchis,Aragon and Salvador of an interaction between testosterone and cocaine on the central nervous system. What is unclear is whether traders could gain success by enhanced testosterone levels due to cocaine intake. The danger is that those desperate for success some will consider this link a given. It is not.
On the other hand when it came to stress, uncertainty was a much bigger driver than failure.
As you might imagine we are only talking male traders here.
There is separate evidence, not in the Economist article, from Spanish scientists, Martinez-Sanchis,Aragon and Salvador of an interaction between testosterone and cocaine on the central nervous system. What is unclear is whether traders could gain success by enhanced testosterone levels due to cocaine intake. The danger is that those desperate for success some will consider this link a given. It is not.
Wednesday, 16 April 2008
A 13 year old deserves respect - be very afraid
You may have missed this. It is a remarkable addition to the library of poorly calculated statistics. Great story - look on 13 year olds with more respect . I found this on the Straits Times Site:
April 16, 2008
German boy, 13, corrects Nasa's asteroid figures
BERLIN - A 13-year-old German schoolboy corrected Nasa's estimates on the chances of an asteroid colliding with Earth, a German newspaper reported on Tuesday, after spotting the boffins had miscalculated.
Nico Marquardt used telescopic findings from the Institute of Astrophysics in Potsdam (AIP) to calculate that there was a 1 in 450 chance that the Apophis asteroid will collide with Earth, the Potsdamer Neuerster Nachrichten reported.
Nasa had previously estimated the chances at only 1 in 45,000 but told its sister organisation, the European Space Agency (ESA), that the young whizzkid had got it right.
The schoolboy took into consideration the risk of Apophis running into one or more of the 40,000 satellites orbiting Earth during its path close to the planet on April 13 2029.
Those satellites travel at 3.07km a second, at up to 35,880km above earth - and the Apophis asteroid will pass by earth at a distance of 32,500km.
If the asteroid strikes a satellite in 2029, that will change its trajectory making it hit earth on its next orbit in 2036.
Both Nasa and Nico agree that if the asteroid does collide with earth, it will create a ball of iron and iridium 320m wide and weighing 200 billion tonnes, which will crash into the Atlantic Ocean.
The shockwaves from that would create huge tsunami waves, destroying both coastlines and inland areas, whilst creating a thick cloud of dust that would darken the skies indefinitely.
The 13-year old made his discovery as part of a regional science competition for which he submitted a project entitled: Apophis - The Killer Astroid.
April 16, 2008
German boy, 13, corrects Nasa's asteroid figures
BERLIN - A 13-year-old German schoolboy corrected Nasa's estimates on the chances of an asteroid colliding with Earth, a German newspaper reported on Tuesday, after spotting the boffins had miscalculated.
Nico Marquardt used telescopic findings from the Institute of Astrophysics in Potsdam (AIP) to calculate that there was a 1 in 450 chance that the Apophis asteroid will collide with Earth, the Potsdamer Neuerster Nachrichten reported.
Nasa had previously estimated the chances at only 1 in 45,000 but told its sister organisation, the European Space Agency (ESA), that the young whizzkid had got it right.
The schoolboy took into consideration the risk of Apophis running into one or more of the 40,000 satellites orbiting Earth during its path close to the planet on April 13 2029.
Those satellites travel at 3.07km a second, at up to 35,880km above earth - and the Apophis asteroid will pass by earth at a distance of 32,500km.
If the asteroid strikes a satellite in 2029, that will change its trajectory making it hit earth on its next orbit in 2036.
Both Nasa and Nico agree that if the asteroid does collide with earth, it will create a ball of iron and iridium 320m wide and weighing 200 billion tonnes, which will crash into the Atlantic Ocean.
The shockwaves from that would create huge tsunami waves, destroying both coastlines and inland areas, whilst creating a thick cloud of dust that would darken the skies indefinitely.
The 13-year old made his discovery as part of a regional science competition for which he submitted a project entitled: Apophis - The Killer Astroid.
Thursday, 10 April 2008
"Not without risk"
William Shakespeare's family motto " Not without Right" was part of his coat of arms which caused some controversy when it was granted on the grounds that an actor could not be a gentleman.
Ben Jonson seemed to think so too and one of his more scabrous characters in a play was a newly minted gentleman whose coat of arms was a boar's head with the hilarious motto " Not without mustard."
But " Not without right" is a cagey, modest motto , a motto for dangerous times. You only have to go to Tower Hill in London and look at the memorial plaques surrounding the old scaffold's location - Thomas More ,Thomas Cromwell, Archbishop Laud and many others- to remember just how precarious life was at court and that the higher you rose the greater the downside risk.
As Sir Walter Raleigh is supposed to have etched with his signet ring on a glass pane
"Fane would I climb,
Yet fear I to fall "
Only to have Queen Elizabeth Ist add her comment underneath to complete the poem
"If thy heart fails thee
Climb then not at all."
Perhaps the Elizabethans' motto should have been " Not without risk" or should we claim it for ourselves?
Ben Jonson seemed to think so too and one of his more scabrous characters in a play was a newly minted gentleman whose coat of arms was a boar's head with the hilarious motto " Not without mustard."
But " Not without right" is a cagey, modest motto , a motto for dangerous times. You only have to go to Tower Hill in London and look at the memorial plaques surrounding the old scaffold's location - Thomas More ,Thomas Cromwell, Archbishop Laud and many others- to remember just how precarious life was at court and that the higher you rose the greater the downside risk.
As Sir Walter Raleigh is supposed to have etched with his signet ring on a glass pane
"Fane would I climb,
Yet fear I to fall "
Only to have Queen Elizabeth Ist add her comment underneath to complete the poem
"If thy heart fails thee
Climb then not at all."
Perhaps the Elizabethans' motto should have been " Not without risk" or should we claim it for ourselves?
Wednesday, 26 March 2008
A fall from a roof top
One Chinese definition of "schadenfreude" is " it is pleasant to see an old friend fall from a roof top."
I disagree. Having yesterday attended the funeral of a friend, who had fallen from his roof just before last Christmas whilst clearing the gutters of leaves ,I can say that there is nothing pleasant at all, just general shock and sadness that a very fit and popular man should be cut down in the prime of life.
Much more to the point is the realisation of how the low probability, high impact events can cause such disastrous consequences. Of course you may say that going up onto the roof is inherently dangerous and therefore the probability was not so low, but my friend, who had lived in the house for 30 years and had doubtless gone on to the roof every year to deal with the leaves, had not considered it a risky venture, confident as he was in his knowledge of the roof, which was not very high and of his own excellent balance and agility. He was a man, who having retired early from a large accountancy practice, had not the slightest interest in risk taking either financial or physical.
Because he did not see the risk as severe he went onto the roof unprepared - no harness, no one to stand at the bottom of the ladder and, most importantly, for it would have saved his life - no hard hat. I don't blame him, I have done the same many times, but I won't in future, for I have been made aware in a most terrible way of the perils of taking risk lightly at home, where we automatically assume that nothing bad can befall us. I tell this story in the hope that those who read it will think more positively of hard hats and wear them when appropriate.
Now if the Chinese had said " it is pleasant to see an arrogant hypocrite fall from the roof top" then I would have taken the roof top to be the metaphorical one which Mr. Spitzer fell off and joined in the clouds of schadenfreude wafting down Wall Street. But an arrogant hypocrite by definition does not equal a friend.
I disagree. Having yesterday attended the funeral of a friend, who had fallen from his roof just before last Christmas whilst clearing the gutters of leaves ,I can say that there is nothing pleasant at all, just general shock and sadness that a very fit and popular man should be cut down in the prime of life.
Much more to the point is the realisation of how the low probability, high impact events can cause such disastrous consequences. Of course you may say that going up onto the roof is inherently dangerous and therefore the probability was not so low, but my friend, who had lived in the house for 30 years and had doubtless gone on to the roof every year to deal with the leaves, had not considered it a risky venture, confident as he was in his knowledge of the roof, which was not very high and of his own excellent balance and agility. He was a man, who having retired early from a large accountancy practice, had not the slightest interest in risk taking either financial or physical.
Because he did not see the risk as severe he went onto the roof unprepared - no harness, no one to stand at the bottom of the ladder and, most importantly, for it would have saved his life - no hard hat. I don't blame him, I have done the same many times, but I won't in future, for I have been made aware in a most terrible way of the perils of taking risk lightly at home, where we automatically assume that nothing bad can befall us. I tell this story in the hope that those who read it will think more positively of hard hats and wear them when appropriate.
Now if the Chinese had said " it is pleasant to see an arrogant hypocrite fall from the roof top" then I would have taken the roof top to be the metaphorical one which Mr. Spitzer fell off and joined in the clouds of schadenfreude wafting down Wall Street. But an arrogant hypocrite by definition does not equal a friend.
Wednesday, 5 March 2008
Major sound bites
"A free and open society is worth a certain amount of risk," so said John Major, last Conservative Prime Minister, at the Guildhall last night where he was the guest speaker at the Chartered Insurance Institute's dinner and in snappingly good form.
He also pointed out that " if we are to control the liberty of individuals we need more uncertainty than that (by which he meant the current threat levels)".
He went on to inveigh against identity cards and dna databases and to point out that governments, of any party, with large majorities did not have to take as much care with legislation and so many poorly drafted got passed which would be better scrutinised by both sides if the government's majority was small. He admitted to there being" Too much legislation- I accept a degree of mea culpa".
" Simplicities in politics so often backfire,"was his phrase which conjured up all the unintended consequences of knee jerk reactions by politicians to tabloid headlines.
Amongst the guests were his old colleagues,such as Lord Heseltine and Lord David Hunt, the President of the CII. Most interesting was the presence of Charles Clarke, the ex Home Secretary. I wonder where he stands now on identity cards and why politicans out of office make so much sense.
He also pointed out that " if we are to control the liberty of individuals we need more uncertainty than that (by which he meant the current threat levels)".
He went on to inveigh against identity cards and dna databases and to point out that governments, of any party, with large majorities did not have to take as much care with legislation and so many poorly drafted got passed which would be better scrutinised by both sides if the government's majority was small. He admitted to there being" Too much legislation- I accept a degree of mea culpa".
" Simplicities in politics so often backfire,"was his phrase which conjured up all the unintended consequences of knee jerk reactions by politicians to tabloid headlines.
Amongst the guests were his old colleagues,such as Lord Heseltine and Lord David Hunt, the President of the CII. Most interesting was the presence of Charles Clarke, the ex Home Secretary. I wonder where he stands now on identity cards and why politicans out of office make so much sense.
Wednesday, 27 February 2008
Hoist by your own robot
The history of warfare is full of stories of people turning their enemies' weapons against them with disastrous results.Today's report from AFP that armed robots could be reprogrammed by terrorists to attack us should come as no surprise.
Prior to an address to the Royal United Services Institute, Sheffield University Professor Noel Sharkey is reported as saying " Military leaders are quite clear that they want autonomous robots as soon as possible, because they are more cost effective and give a risk-free war......The use of such devices by terrorists should be a serious concern."
It seems stating the obvious that if the robots can be turned against you then you do not have risk-free war.
"Terminator" style machines will eventually be developed. Will they make better , more precise decisions than troops on the ground who get confused, angry and scared? Probably. Will we feel safer, more secure, more willing to find a peaceful solution? Probably not.
Prior to an address to the Royal United Services Institute, Sheffield University Professor Noel Sharkey is reported as saying " Military leaders are quite clear that they want autonomous robots as soon as possible, because they are more cost effective and give a risk-free war......The use of such devices by terrorists should be a serious concern."
It seems stating the obvious that if the robots can be turned against you then you do not have risk-free war.
"Terminator" style machines will eventually be developed. Will they make better , more precise decisions than troops on the ground who get confused, angry and scared? Probably. Will we feel safer, more secure, more willing to find a peaceful solution? Probably not.
Monday, 18 February 2008
Downhill Risk
Last week in the Daily Telegraph there was the obituary of a Richard Burton who died on January 6th 2008. Not the one who married Elizabeth Taylor twice, but the one who survived 65% burns in a racing car accident , married five times and employed Sarah Ferguson before she became Duchess of York. As my father would have said "He was quite a boy." He was also the direct descendant of Robert Burton who wrote "The Anatomy of Melancholy." Melancholy does not seem to have been a problem, rather an excess of joie de vivre.
One wonderful snippet went as follows " Burton married often and was a fount of knowledge on the art of making love; for example, he insisted that when doing so on a mountainside it was important to be facing downhill."
In the interest of think risk, smarter decisions I leave it to my readers to think through the possible consequences of Burton's downhill tryst.
One wonderful snippet went as follows " Burton married often and was a fount of knowledge on the art of making love; for example, he insisted that when doing so on a mountainside it was important to be facing downhill."
In the interest of think risk, smarter decisions I leave it to my readers to think through the possible consequences of Burton's downhill tryst.
Wednesday, 26 September 2007
Raising standards at no cost
Standards are useful, but when they cost money then many, who would benefit from understanding them and using them, just don't bother.
If you have business in China you might like to know that just a few days ago we arranged for the Chinese Risk Management Standard which was in the more traditional script used in Hong Kong and Taiwan to be translated into simplified Chinese which is more easily accessible to those who live in mainland China. This translation was carried out in less than 2 days by the staff of Ximco Corporation in Shanghai and we are very grateful for their efforts.
The original Risk Management Standard was developed in 2002 by the Institute of Risk Management, the Association of Insurance and Risk Managers and the National Association for Risk Management in the Public Sector. It has been downloaded over 100,000 times in English and is available in French, German, Italian, Spanish, Portuguese, Polish, Dutch, Danish,Swedish, Russian, Arabic, Japanese and now in two forms of Chinese. Here is the link to the new simplified Chinese Risk Management Standard. It is available free of charge, as it should be.
Download the Simlified Chinese Risk Management Standard...
If you have business in China you might like to know that just a few days ago we arranged for the Chinese Risk Management Standard which was in the more traditional script used in Hong Kong and Taiwan to be translated into simplified Chinese which is more easily accessible to those who live in mainland China. This translation was carried out in less than 2 days by the staff of Ximco Corporation in Shanghai and we are very grateful for their efforts.
The original Risk Management Standard was developed in 2002 by the Institute of Risk Management, the Association of Insurance and Risk Managers and the National Association for Risk Management in the Public Sector. It has been downloaded over 100,000 times in English and is available in French, German, Italian, Spanish, Portuguese, Polish, Dutch, Danish,Swedish, Russian, Arabic, Japanese and now in two forms of Chinese. Here is the link to the new simplified Chinese Risk Management Standard. It is available free of charge, as it should be.
Download the Simlified Chinese Risk Management Standard...
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