Groupthink

IMF evaluated its role and performance in the recent financial and economic crisis.

Cause

In a 2011 crisis report with the short title: 'IMF Performance in the Run-Up to the Financial and Economic Crisis:IMF Surveillance in 2004–07 ', IMF concludes that the main cause of their inadequate response during the crisis was:

Groupthink

IMF’s ability to detect important vulnerabilities and risks and alert the membership, was undermined by a complex interaction of factors, many of which had been flagged before but had not been fully addressed.

The IMF’s ability to correctly identify the escalating risks was hindered by:

1. A high degree of groupthink 
2. Intellectual capture
3. A general mindset that a major financial crisis was unlikely
4. Inadequate analytical approaches
5. Weak internal governance
6. Lack of incentives to work across units and raise contrarian views
7. A review process that did not “connect the dots” or ensure follow-up
8. Some impact of 'political constraints'....

Recommendations

IMF suggests some recommendations on how to strengthen its ability to discern risks and vulnerabilities and to warn in the future. Main point is to enhance the effectiveness of surveillance: it is critical to clarify the roles and responsibilities of the Board, Management, and senior staff, and to establish a clear accountability framework.

Looking forward, IMF needs to

1. 
   Create an environment that encourages candor and considers dissenting views
    
2. Modify incentives to “speak truth to power”
    
3. Better integrate macroeconomic and financial sector issues
   
   
4. Overcome the silo mentality and insular culture; Deliver a clear, consistent message on the global outlook and risks.

Recognize Groupthink
Groupthink is not just something happening to IMF or 'other organisations'. We, financial institutions, all suffer somehow or somewhat from the Groupthink Virus.

How can we recognize Groupthink?
Derived from an article by Irving Janis, the inventor of the word Groupthink, let's take a look at some explicit signs of Groupthink:

1. Winning Mood syndrome
   A common illusion of success (Folie à deux), invulnerability, over-optimism, unanimity and risk-taking as a consequence.
2. Collective rationalization
   Managers, employees discount warnings and do not reconsider their assumptions
3. 
   Repression or Ridicule
   Direct pressure on and ridicule of  individuals who express disagreement with or doubt about the majority view or the view of the leader
4. Fear
   Fear of disapproval for deviating from the group consensus. Fear from or doubt about expressing your opinion.
5. Manipulating
   Remaining silent in a discussion is implicitly interpreted as agreeing.Obviously 'wrong' arguments are used to achieve a certain goal or policy.
6. Disrespect
   Stereotyped views of out-groups or enemy leaders as evil, weak or stupid. Good or serious ideas of colleagues are rejected on basis of the source instead of 'judged by the facts'.
7. Moral Blindness
   Unquestioned belief in the inherent morality of the in-group. Lack of discussion about ethical or moral aspects of certain decision.
8. Miscommunication and Misinformation
   Information, bottom up or top-down is (deliberately) strongly filtered
9. Idolization
   Idolization of the leader or of certain five star employees.

Lessons Learned
If you recognize some of the above signs in your organization, it is time for action.
Discuss it, do not accept it and if you cannot change it... LEAVE!

A humorous example of Misinformation are the quotes of Iraq's minister of (Mis)Informaton, Al-Sahaf, during the 2003 Iraq war.
Enjoy, laugh and learn.....



Make sure your board presentation is not based on' sahaf-statements' but on simple provable actuarial facts....

Related links/sources:
- 8 signs of groupthink
- What is Groupthink?
- IMF Crisis Report 2011

Actuary Bill Gates

For those of you that -just like me - didn't know that Bill Gates is actually a qualified actuary....



Bill Gates.., a man with a great vision and the same size of philanthropic heart. More information about Bill on the 'Bill and Mellinda Foundation' website, were another actuarial statement is launched:

All Lives Have Equal Value

With all due respect for Obama: Bill gates for president!

Links:
- 2010 Annual Letter from Bill Gates

Supervisory Compliant, is it enough?

Risk management is tricky business... Being 'Officially Compliant', 'Just Compliant' or in other words "Supervisory Compliant", is not enough to help your CEO survive with your company in the complex market battle!

Whether you're an Actuary or Risk Manager of an Insurance company, Bank or a Pension Fund, the risk of being 'Supervisory Compliant' is simply : bankruptcy!

Becoming 'Supervisory Compliant' in complex programs like Solvency-II, Basel III or Legal Pension Fund Risk Frameworks, consumes so much time and effort, that almost no time seems to be left for contemplating or doing the essential Risk Management work properly.

Just being 'Supervisory Compliant' implies:  constantly running after the Supervisor to become  'just in time' officially compliant and not having enough time to think about the (f)actual relevant risks.

Supervisory Compliance becomes very frighting when Risk Appetite and Valuations are rashly based upon the minimum Supervisory requirements, as is (e.g.) the case in the Dutch Pension Fund legal framework. Boards stop thinking about the actual risks and feel compliant and satisfied once the Supervisory Compliance Boxes are checked.

A new look at compliance
Let's take a look from a new point of view at the complete Risk Management Compliance Field:

In basis there are three types of 'being compliant':

1. Supervisory Compliant
   When you're Supervisory Compliant, you officially comply to all legal Risk Management compliance requirements. Your Supervisor is happy...
   
   
2. Professional Compliant
   You comply to your own professional Risk Management standards. You are happy...  but what about your Supervisor? Comply or Explain....
   
   
3. Success Compliant
   Being Success Compliant implies that all Risk Management requirements that are key to have success - e.g. key to survive in the market on the long run - are met.

Let's zoom in at some specific areas in this chart:

Bias areas

It's perhaps hard to admit, but in our attempt to be complete, we define and manage a lot of (small) risks that do actually exist, but are in fact not really or limited relevant with regard to company continuity.

Distinctive Character area

The Distinctive Character area is perhaps the most interesting area. To get grip on this area urges us to 'Think outside the Circle'.

By doing so we'll be able to manage risks that  our competitors fail to do. Here we can achieve 'Distinctive Character' by managing risks more efficient or by turning risks into profits. Examples are: Derivatives that limit our investment risks. Specialized experience rating (rate making) on your portfolio on basis of characteristic and unique risk profiles.

Tricky area
The tricky area is the area that consists of Supervisory Risks you tend not to find important, but that are very important for achieving success in the market. Tricky areas could e.g. be: Deflation Risk, Longevity Risk or Take Over Risk.

Reversed Thinking area
This is perhaps the most interesting risk area.

To explore this area you'll not only have  to 'think outside of your circle', but - just like in reversed stress tests with Banks - try to think backwards, to find out what could cause a certain event or loss.

This reversed thinking process succeeds best as a group. Group members should be professionals and non-professionals from different types of business, education and background.

A successful group mix could e.g. consist of : an actuary, an accountant, a manager, a marketing manager, a compliance officer, an employee, a client, a shareholder representative and last but not least the receptionist.

Finally.....
Try to find time to manage your company to new heights and stop being just 'Supervisory Compliant'.....