Thomson Reuters' Breakingviews now presents an on line DIY stress test. Change the Tier 1 ratio and haircuts of the PIIGS countries and find out the capital shortfall of Europe and the shortfal of individual European banks.
On Wednesday night 5th October, Apple co-founder, former CEO and chairman Steve Jobs, passed away..
Steve Jobs' life is an example to all of us. In an excellent and catching speech, Steve urged graduates to pursue their dreams and pick up the opportunities in life's setbacks at the university's 114th Commencement on June 12, 2005.
What - besides Steve's phenomenal contributions to computer technology and marketing - did Steve contribute to the profession of Risk Management?
Steve Jobs' Risk Management Lessons
Here are (derived from his 2005 Stanford speech) some inspiring lessons from Steve. Lessons we can apply 'one to one' on Risk Management (my comments in Italic):
Connect 'the dots' in life
It's impossible to connect the dots looking forward,you can only connect them looking backwards, later in life. Do so!
To turn Risk Management into an opportunity, we can't look in a crystal ball. We'll have to explore and have to allow ourselves some experiments and non-conventional ideas to finally see the bigger picture that turns marginal new business developments into one new final integral success!
Try to develop 'Risk Oversight' (connecting the dots) as Risk Oversight is negatively related to risk and positively related to shareholder value (Research Stanford University).
Trust
You have to trust that the dots will somehow connect in your future.
Believe in something and follow your heart, even if it leads you of the well-worn path..
Make Risk management supportive and not dominant to what you want to achieve in life or business. It's positive when companies Ideas and Vision sometimes conflict with inner and outer notions.
To grow a plant (company) in soil (society) is takes opposite 'nutrients' (and circumstances) like water and sun that feed your seed (idea).
Accept that your heart, gut feeling and helicopter view are sometimes more leading than the rationale of your Risk management (what your brain thinks). The more and the longer you are able to manage this paradox, the more likely success will come your way eventually.
Keep all the above decision elements in ('a paradoxical') place. Remember Shareholder Value and Sustainability are a function of Risk, so don't pull the plug too soon!
Love and Loss
Making mistakes is an inherent part of life and doing business.
If you (or something you started) fails, start over!
The effect of less sureness by 'starting over', inspires for exploring new directions and becoming creative again.
'Love what you do' is the most important leading statement to proceed in life and business.
'Sometimes life hits you with a brick'. Don’t lose faith.Your time is limited, so don’t waste it living someone else’s life.
Risk Management exists by the grace of losses that occur. Accept that as a fact. Therefore, if no losses occur anymore, your Risk Management program is actually dead without a clue. It will certainly fail eventually.
Getting knocked down by a 'brick' like in the current financial crisis, is a sign that we have to redesign our Risk Management programs instead of intensifying existing programs like Basel II /III and Solvency II. Get out!
New Risk Management will have to focus on how to prevent and to DEAL with risk, instead of sophisticated capitalizing risk as Dead Risk Capital. Rather than focus on reducing risk, risk-transformation — that is, capitalizing risk in such a way that its value creation potential is maximized - seems the right way forward.
Death If you live each day as if it was your last, someday you'll most certainly be right. Remembering you'll die is the most important tool to help you make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important.
Remembering that you are going to die is the best way to avoid the trap of thinking you have something to lose.
Risk Management is about making choices and giving up less important issues for more important. It's about generating focus on what really matters for sustainability or results, instead of trying to manage everything.
Good Risk management therefore urges for CEO and Board rewards that reflect the downside risk of a company's default instead of just rewarding upward and short term profit.
Company bonuses should therefore be positive as well as negative performance related.
This blog is specially written for (1) those who are still in the denial phase and (2) 'actuarial life gamers' who just want to enjoy actuarial gaming....
Pension Game
Games are an excellent way to involve people (employees) in a complex and (two fold) 'low interest product' like pension.
Games, like the above pension game, conquer the world more and more.
Gamification
It looks like everything that has to be sold or communicated, succeeds better with the help of a game. Gamification gets people more engaged, helps change behaviors and stimulates innovation. In other words:
Gamification rules our life
As an example of gamification, Gartner cited the U.K.’s Department for Work and Pensions, which created an innovation game called Idea Street to decentralize innovation and generate ideas from its 120,000 people across the organization. Idea Street is a social collaboration platform with the addition of game mechanics, including points, leaderboards and a “buzz index.”
The employees went wild for it. Within 18 months, Idea Street had approximately 4,500 users and had generated 1,400 ideas, 63 of which had gone forward to implementation.
All and more of this in the 2011 report of Gartner that states that by 2015, more than 50% of organizations tat manage innovation processes will gamify those processes.
Consequences
Mainly as a consequence of the overdose of gamification in our society, people get confused and lose sight on the difference between reality and illusion.
This confusion is exacerbated by the fact that negative effects of the current financial crisis have been 'managed away' in stead of letting people and organizations 'perceive' and 'experience' the (negative) financial consequences of their handling.
The 'Hocus Pocus Society'
This way, we gradually created a 'Hocus Pocus Society' where all our (actuarial) models and convictions are doomed to fail as the 'game of life' seems to be to:
challenge the established (good governance) rules to raise profit and returns to an unrealistic level, by introducing uncontrolled and uncontrollable mechanisms and financial instruments like 'market value', 'derivatives', 'sub-prime mortgages', 'High Frequency Trading', etc.
try - at the same time - to capture and control these volatile 'unwanted' effects of these mechanisms and instruments by an overdose of hypocritical additional regulation (Solvency (II), Governance, etc.)
transfer and lay back fundamental complex risk to consumers and communicating this in such a (so called) 'transparent' but oversimplified 'way', that consumers for sure lose their trust in financial institutions as a whole.
end up in new, for the financial institutions, 99,9% risk free financial products and offerings on the marketplace with a non corresponding stock holders dividend level.
This illusory way of communication about pensions is well demonstrated in the next 'Pension game' video: The myth of your (401K) pension
Way out
To get out of this down spiral cycle in the fiancial industry, we'll have to learn from other industries.
Just like in the case of introducing new medicines , new financial products will have to meet a number of tests and need explicit approval by in and external regulators before they are allowed to be introduced on the market place.
Anyhow: Don't end up like a 'Hocus Pocus Actuary' and game up your actuarial life!
Actuary Info is a brain teaser Blog with non-conventional, witty, remarkable and serendipitous financial and actuarial related news.
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