Risk Management in the new world: The inevitable conundrum
Risk Management as a subject is far expansive than a tool, or a set of tools. Since time immemorial, this discipline is in vogue to actively, and passively, manage activities that bring lesser misfortune in lives of people, and countries. As life is unpredictable, yet we all want to demystify it, either mathematically or metaphysically, it is considered the biggest risk itself. Human minds, the epicentre of insatiable thirst for knowledge, started unravelling the uncertainties by posing scientific questions, and noting down answers, including partially derived solutions.
As we look at those questions, as a serious student of risk, we find that much of them had had intuitive answers in-built in the process of framing those questions. Questions are basically a precursor to the ‘answers’ or ‘solutions’ already existing somewhere. No question has ever been devised for which an answer does not exist. The answer may be out of the immediate human comprehension, but it DOES exist!
Risk management, in general, has a more intuitive than mathematical approach. As we go into the depths of the subject, and unravel the propensity of the faculties that guides this discipline, you will be enthralled to discover how elegantly the blocks to this discipline have been laid out; how a group of learned observers used the known tools of science to create extraordinary results, that are intuitive than empirically proven. I always love saying, that Risk has an intuitive and elegant approach, and that, the world has an intuitive understanding of risk.
Through this blogpost, I would communicate with you on this elegant subject; how it is used as a fundamental guiding force, and not a mere tool, to predict and address uncertainty, technically called the Volatility. I, for my part, being a lifelong student of Risk Management, and an industry insider for over 20 years, would guide you, anyone who is keen in diving deeper into the apparently fathomless depths of the discipline, and learn more in the process. Life is, like Risk itself, unknown and the only way we deal with this principal of uncertainties is to make knowledgeable, informed decisions. They will not be 100% correct. As I said in the beginning, only the uninformed ‘predicts’, the knowledgeable ‘performs’. By learning the principles of Risk, one gets ready to face volatilities with conviction; while the uninitiated would be consumed by it!
As a focused professional, I would be dealing with Financial Risks. Financial risks affect the financial performance of organizations, all organizations irrespective of their business models. But financial risks have the highest, potent impact on the Financial Services industry, where I myself belong, which is a complex web of products and services designed for financial intermediation. These organizations also deal with other peoples’, or Clients’ money, thus making them more susceptible to various other forms of risks that are derivatives of the main sources of risks underlined and understood. Always remember, risk is multi-dimensional and proliferating. If you assume certain risks, they will multiply manifold through other channels, and create additional risks for you. It is not possible to do business, like leading life, without assuming risks. Risks are thus managed continuously, and not discreetly. Anything continuous has a path, known or unknown. The known path has been the historical one, through which you treaded and noted down your valuable experience. Why you did so? Because they are your guidance factors for the future path, which is unknown, hence unpredictable. The previously learned experiences is the focused lamp that would reflect light in the seemingly darker (unknown) futuristic path. How dark the future path looks like? Impenetrable if your previous learnings bring a zero outcome. A tunnel-like if you apply knowledge, along with experience, where the end is incandescent!
Risks operate in an entangling fashion. It defines the relationship between entities (Credit Risk), through instruments (Market Risk) that have operability standards (Operations Risk – involving people and processes) that must be followed for smooth market and societal functioning.
We live in a complex world. The level of automation (computerization) has led industries to data driven decision making. Data is the root of all decisions these days. One needs to understand the data points that drive performance and results. We will keep this as a focused item for our discussed topics. We will use certain data to tell why we think certain things look the way they are. But always remember, a data heavy presentation is no guarantee for a right ‘prediction’. It is merely better than a purely intuitive decision making!
We live now in the time of the pandemic. It has, unlike the last lethal one, the Spanish Flu, redefined the activities of a much tied up or ‘globalised’ World. At the same time, it has also shown a great resiliency and opportunities to improve.
I pointed out, in an article in LinkedIn a few weeks ago, that I feel certain things are not right, and that the markets are poised for another storm looming in the horizon. I feel it to be my duty to state as to why I think that way. I am not in a position to state or prove (‘’see I told you so,….’’ ) my feelings to the nearest decimal points (of accuracy), nor do I proclaim myself as a qualified doomsayer. All I would focus on is the need to improve and create opportunities that work in a highly probabilistic world. My articles on this blog would state why I see a ‘black swan’ in a way I do, and what I would do to safeguard. That is certainly not a guarantee I am providing or a hedging tool I am offering. Always remember, as a student of risk you have to think unconventionally, even within the set organizational parameters that become your daily classrooms, and pose scenarios before yourselves and your organizations. These scenarios will be the guiding principles for the next level of changes.
Finance & Risk Demystified 