Aug 24, 2012

Humor: Penguin Risk Management

Life ain't easy ... sometimes.... Especially not... when you're a risk manager....

Changing Professional Field of Risk
In order to make any kind of progress in our human - penguin like - society, we'll have to take risk...

Part of a risk manager's task is to check regularly whether parties, (e.g.  asset managers)  are acting in line with the defined risk mandates (compliance). 

It's more or less generally accepted that a risk manager's first task is to prevent, control and optimize risks from a mainly defensive point of view.

we live in a 'risk growing world' where (state) regulators and accounting standard boards increasingly prescribe all kind of risk controlling measures.

In this world it becomes more and more important that a risk manager also advices actively on where and when to take more risk, instead of less risk.

Zero Risk Attitude: Death by Risk Management

Taking less and less risk gradually leads to a zero risk position.

An (on top of)  'zero risk attitude' of a risk manager can therefore become the nail in the coffin of any financial company. As without risk there's no profit, and without profit any financial company is doomed.

So skip any form of 'scary risk management', face risk as it is and changes in time. Moreover, develop and demand a positive, realistic and dynamic risk view of yourself and your professional environment.

Risk, Part of Evolution
History shows that taking major risks is essential in successful exploring new areas.

A few examples:
  • Discovering America
    The (re)discovering of America by Columbus took a lot of lives. Shipwrecks, bad weather, diseases and fights took its toll.
  • Radioactivity
    Discovering the properties and applications of radioactivity took many lives. Example : Marrie Curie died as a result of prolonged exposure to radiation.
  • Exploring Space
    Many astronauts died on the the Gemini, Apollo an shuttle projects About 5% of the astronauts that have been launched, have died.

Future Risk Space Programs: Dream Chasing
At the start of the Shuttle program, NASA managers thought (calculated?) there was only a '1-in-100,000' chance of losing a shuttle and its crew.
Today, engineers believe this probability was in fact closer to 1 in 100. 
NASA’s basic requirement for new commercial crew vehicles is a probability of 1 in 1000 (!).

On basis of these modern risk standards, the original Apollo project back in 1961 would not even have started.

Looking at our 'Exploring Space' ambitions, it's likely that due to higher risk standards, cost of new space programs will increase to a level where no profitable exploitation (at all) is possible.

In other words: Profitable exploitation of future crewed flights to other planets will turn out to be a real 'Dream Chaser'.

Let's be fair, after 1972 we've never been back to the moon. Yet, plans to go to Mars are presented as 'business as usual'....

At the same time risk standards increase and costs explode.
Forget about going to Mars at current risk standards!

Financial Risk Equivalent
Just like in the space industry, risk standards in the financial industry have increased. From old demands, like the 2.5% one year default rate (97.5% confidence level)  of Dutch pension funds to the 1.0% - 0.5% default rate in the insurance and 0.1% - 0.05% in the banking industry.

In general, raising default risk standards by lowering default levels is a dead end street. It's much more effective to tackle other risk topics like controlling 'systemic risk' and 'company size' and accept risk as a fact of life.

Penguin Behavior
Perhaps - regarding risk and size - we can learn from penguin behavior. Although king penguins are highly gregarious at rookery sites, they usually travel in small groups of 5 to 20 individuals.

Just like we humans, penguins have to take risk in order to survive. In our research for risk we have to accept risk, and therefore loss, as a necessary unavoidable part of (financial) life.
Let's learn from penguin Risk management.....


Let's wrap up with penguin wisdom:
To survive as society on the long term, we need to create smal(ler) companies with a limited exposure to systemic risk and a higher risk attitude.

Risk is a part of life, explore but don't kill it, as it will kill you...

Links & Used Sources:
- Apollo by numbers
- Percentage of fatal space flights
- Analysis: NASA underestimated shuttle dangers 
- Certified Safe (2011)
- Dream Chaser
- POLE Penguins Comic Strip

Mars?  Perhaps in 2525?


  1. I think this piece has been written extremely well.
    You have made your point very well.

  2. risk is everywhere, enjoy risk
    great writing i like it.