Our Conversations section features in-depth interviews with leading figures in risk management. Mark Siwik, founder of SandRun Risk, conducts this conversation with Felix Kloman, a longtime student, thought leader, and writer in the field.
As a student of risk management, what energizes you? What are you reading now?
The perpetual question that continues to energize me is “What if?” Given my age and the time to explore, I find myself reading far more than I did when working as a consultant. For example, I’ve just finished Michael Lewis’s The Undoing Project, an illuminating description of the collaboration of Amos Tversky and Daniel Kahneman as they tried to unravel the human mind. Plus Dan Ariely’s Payoff, an analysis of what motivates us. And Tom Friedman’s Thank You for Being Late - an optimistic look at the world today and especially its changing and developing technologies, its economic globalization, and our on-going climate change. Let me offer some ideas from Friedman’s book that I found interesting.
Friedman cites the ideas of many sources, old and new, from around this globe. Eric Teller, the CEO of Google X, its R&D Lab argues "Without clear knowledge of the future potential or future unintended negative consequences of new technologies, it is nearly impossible to draft regulations that will promote important advances--while protecting ourselves from every side effect." But we can never have "clear knowledge of the future" as Teller also admits. Friedman and Teller continue: " . . . what we are experiencing today, with shorter and shorter innovation cycles, and less and less time to learn to adapt,’ is the difference between a constant state of destabilization versus occasional destabilization.” Isn't this radical uncertainty?
Then Friedman offers the comments of Adam Sweidan, a London-based environmentalist, on black swans and "black elephants.“ A "black swan is a rare, low-probability, unanticipated event with enormous ramifications" and "the elephant in the room" is a "problem widely visible to everyone. yet that no one wants to address." A "black elephant," then, is a combination of the two, one that "we absolutely know will have vast black swan-like consequences one day." We see it but cannot acknowledge it.
So how should we react to this state of radical uncertainty and the need to be radically inclusive, especially with our own employees? Friedman cites Bill Blase, the HR man at AT&T: "The idea is to be totally transparent with our employees about where the business is headed and what the challenges will be.” Friedman also returns to Charles Darwin's thesis that adaptability is the key to survival, leading to evolutionary resilience. Great theory, but how do we instill this idea when the human brain seems to seek some form of "certainty" at any cost? Is an ostrich "certain?"
We all need good exercise in brain-picking and reading helps us challenge our ideas.
Looking ahead to the next 20 to 30 years or beyond (25 to 50 years), what should be our learning priorities for the future of risk management?
I suspect that our paramount learning priorities should be increasing our curiosity and keeping an open mind, guiding principles that I have tried to follow throughout my career. We must listen to what is going on!
Take enterprise risk management for example, its future will depend on whether we can overcome the misuse and misunderstanding of “risk.” The subject goes far beyond insurance, which I have repeatedly stated, is never “risk transfer.” This is a challenge for the insurance industry at times because too often, it thinks it operates as a “risk transfer” vehicle, when it fact it is simply a “risk sharing” mechanism, one with high costs and narrow views. A forecast: we may see the business of risk sharing move into banks and financial institutions and governments.
The best resource about enterprise risk management is the Fraser-Simkins book (Enterprise Risk Management - 2010) which I contributed a section of the brief history of risk management spanning antiquity, the middle ages, and the past 100 years. Yet, I know that John Fraser’s opinions have changed materially since then, as must all of ours.
Risk management remains a developing discipline, even as it expands to encompass the entire enterprise. It embodies the basic caution that we can never really know the future. We can only strive to prepare for it more intelligently.
How will data analytics and automation affect risk management?
Both behavioral science and artificial intelligence are expanding so rapidly that the best I can do is to try and keep abreast of developments. Both will significantly affect how we consider and respond to future possibilities. My sense is that we will continue to learn how to use Big Data more constructively, with numerous sidesteps and pitfalls. But we should remain cautious, as all data come from the past, and the future is changing much too rapidly.
There are never easy answers as much we would like to have them. Caution is a wise watchword, plus doubt and curiosity. Jump one way of the eye of a hurricane and you are hit with strong winds from one direction; jump the other way and the winds are the exact opposite. So, it is in this world. Use all the data we have but be wary. Avoid being an automaton yourself!
How important is an interdisciplinary approach to the future of risk management?
Essential! Douglas Barlow, my friend and colleague and one of the first risk managers to construct a global insurance program, said that “all management is risk management.” If so, why do we need all these overly complex descriptions of what is an innate process of the human mind? Every time, I see overused words and clichés (risk appetite, risk culture, risk maturity etc.), I become concerned that risk management certifications are meaningless.
I think that in addition to learning through a certification program of some type (they are innumerable), a reading list of a few notable books for new practitioners is a valuable approach. How valuable are standards and certifications? I prefer to think that we can use guides and suggestions as we try to find our own ways of dealing with uncertainty. And let us encourage our fellow students of risk management to use their own judgments and imaginations to construct a course for their organization.
In an earlier part of this interview, I gave a few reading suggestions but here is a longer list that I have kept updated over the years. I ask our readers what others should be added?
A Risk Management Reading List
The discipline of risk management attracts an increasing number of commentators and their books, making it almost impossible to keep up with the flow. This is my reading list, updated through 2012. It is thoroughly personal, based on my own reading and interests, and it is always in flux. This list, which started out as my “ten best,” has inevitably expanded because of the need to cover history and philosophy as well as the significant offerings in finance, public policy and behavioral economics. The earliest selection appeared in 1921 and the latest in 2012.
Here are my selections:
The perpetual question that continues to energize me is “What if?” Given my age and the time to explore, I find myself reading far more than I did when working as a consultant. For example, I’ve just finished Michael Lewis’s The Undoing Project, an illuminating description of the collaboration of Amos Tversky and Daniel Kahneman as they tried to unravel the human mind. Plus Dan Ariely’s Payoff, an analysis of what motivates us. And Tom Friedman’s Thank You for Being Late - an optimistic look at the world today and especially its changing and developing technologies, its economic globalization, and our on-going climate change. Let me offer some ideas from Friedman’s book that I found interesting.
Friedman cites the ideas of many sources, old and new, from around this globe. Eric Teller, the CEO of Google X, its R&D Lab argues "Without clear knowledge of the future potential or future unintended negative consequences of new technologies, it is nearly impossible to draft regulations that will promote important advances--while protecting ourselves from every side effect." But we can never have "clear knowledge of the future" as Teller also admits. Friedman and Teller continue: " . . . what we are experiencing today, with shorter and shorter innovation cycles, and less and less time to learn to adapt,’ is the difference between a constant state of destabilization versus occasional destabilization.” Isn't this radical uncertainty?
Then Friedman offers the comments of Adam Sweidan, a London-based environmentalist, on black swans and "black elephants.“ A "black swan is a rare, low-probability, unanticipated event with enormous ramifications" and "the elephant in the room" is a "problem widely visible to everyone. yet that no one wants to address." A "black elephant," then, is a combination of the two, one that "we absolutely know will have vast black swan-like consequences one day." We see it but cannot acknowledge it.
So how should we react to this state of radical uncertainty and the need to be radically inclusive, especially with our own employees? Friedman cites Bill Blase, the HR man at AT&T: "The idea is to be totally transparent with our employees about where the business is headed and what the challenges will be.” Friedman also returns to Charles Darwin's thesis that adaptability is the key to survival, leading to evolutionary resilience. Great theory, but how do we instill this idea when the human brain seems to seek some form of "certainty" at any cost? Is an ostrich "certain?"
We all need good exercise in brain-picking and reading helps us challenge our ideas.
Looking ahead to the next 20 to 30 years or beyond (25 to 50 years), what should be our learning priorities for the future of risk management?
I suspect that our paramount learning priorities should be increasing our curiosity and keeping an open mind, guiding principles that I have tried to follow throughout my career. We must listen to what is going on!
Take enterprise risk management for example, its future will depend on whether we can overcome the misuse and misunderstanding of “risk.” The subject goes far beyond insurance, which I have repeatedly stated, is never “risk transfer.” This is a challenge for the insurance industry at times because too often, it thinks it operates as a “risk transfer” vehicle, when it fact it is simply a “risk sharing” mechanism, one with high costs and narrow views. A forecast: we may see the business of risk sharing move into banks and financial institutions and governments.
The best resource about enterprise risk management is the Fraser-Simkins book (Enterprise Risk Management - 2010) which I contributed a section of the brief history of risk management spanning antiquity, the middle ages, and the past 100 years. Yet, I know that John Fraser’s opinions have changed materially since then, as must all of ours.
Risk management remains a developing discipline, even as it expands to encompass the entire enterprise. It embodies the basic caution that we can never really know the future. We can only strive to prepare for it more intelligently.
How will data analytics and automation affect risk management?
Both behavioral science and artificial intelligence are expanding so rapidly that the best I can do is to try and keep abreast of developments. Both will significantly affect how we consider and respond to future possibilities. My sense is that we will continue to learn how to use Big Data more constructively, with numerous sidesteps and pitfalls. But we should remain cautious, as all data come from the past, and the future is changing much too rapidly.
There are never easy answers as much we would like to have them. Caution is a wise watchword, plus doubt and curiosity. Jump one way of the eye of a hurricane and you are hit with strong winds from one direction; jump the other way and the winds are the exact opposite. So, it is in this world. Use all the data we have but be wary. Avoid being an automaton yourself!
How important is an interdisciplinary approach to the future of risk management?
Essential! Douglas Barlow, my friend and colleague and one of the first risk managers to construct a global insurance program, said that “all management is risk management.” If so, why do we need all these overly complex descriptions of what is an innate process of the human mind? Every time, I see overused words and clichés (risk appetite, risk culture, risk maturity etc.), I become concerned that risk management certifications are meaningless.
I think that in addition to learning through a certification program of some type (they are innumerable), a reading list of a few notable books for new practitioners is a valuable approach. How valuable are standards and certifications? I prefer to think that we can use guides and suggestions as we try to find our own ways of dealing with uncertainty. And let us encourage our fellow students of risk management to use their own judgments and imaginations to construct a course for their organization.
In an earlier part of this interview, I gave a few reading suggestions but here is a longer list that I have kept updated over the years. I ask our readers what others should be added?
A Risk Management Reading List
The discipline of risk management attracts an increasing number of commentators and their books, making it almost impossible to keep up with the flow. This is my reading list, updated through 2012. It is thoroughly personal, based on my own reading and interests, and it is always in flux. This list, which started out as my “ten best,” has inevitably expanded because of the need to cover history and philosophy as well as the significant offerings in finance, public policy and behavioral economics. The earliest selection appeared in 1921 and the latest in 2012.
Here are my selections:
- Peter Bernstein, Against the Gods: The Remarkable Story of Risk, John Wiley & Sons, New York (1997): Peter’s “epic” easily tops my list in terms of value, perspective, and prose quality.
- Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable, Random House, New York 2007: a caution on the fragility of knowledge and the limitations of experience and learning. Uncertainty prevails and the unexpected will occur. His Fooled By Randomness (2001) is also worth reading. And do not miss Antifragility: Things That Gain from Disorder, Random House, New York 2012.
- Billy Vaughn Koen, Discussion of the Method, Oxford University Press, Oxford (2003): This is an engineer’s challenging dissertation on dealing with uncertainty through the use of continually- updated “heuristics,” or rules-of-thumb.
- Frank Knight, Risk, Uncertainty and Profit, University of Chicago Press, Chicago (1921), reissued by Harper & Row, New York (1965): This remains the “classic” introduction to the subject.
- John Adams, Risk, UCL Press, London (1995): John’s dissection of risk and its management is a pertinent and thoughtful work of art.
- Peter Schwartz, The Art of the Long View, Doubleday, New York (1991): The classic introduction to scenario analysis, from an architect of its use at Royal Dutch Shell.
- Richard P. Feynman, The Pleasures of Finding Things Out, Perseus Books, Cambridge, Massachusetts 1999: Profound wisdom on the nature of uncertainty, the importance of continuing doubt, the limitations of the scientific method and the glory of “muddling through.”
- Vernon Grose, Managing Risk: Systematic Loss Prevention for Executives, Prentice-Hall, New York (1986): An aeronautical engineer’s practical and early introduction to the risk management process.
- Vlasta Molak, Editor, Fundamentals of Risk Analysis and Risk Management, CRC Press, Boca Raton, Florida (1997): The essentials from the view of public policy practitioners.
- James Lam, Enterprise Risk Management, John Wiley & Sons, New York (2003): An expression of the expansion of the discipline throughout an organization, as written by the first Chief Risk Officer.
- Michel Crouhy, Dan Galai and Robert Mark, The Essentials of Risk Management, McGraw-Hill, New York (2006): A second, updated edition incorporating the essence of financial risk management.
- Robert J. Shiller, Irrational Exuberance, Broadway Books, New York (2000): An introduction to some of the behavioral aspects of what we do. See also Shiller and Akerlof’s Animal Spirits, Princeton University Press, Princeton, NJ (2009)
- William Leiss, In the Chamber of Risks: Understanding Risk Controversies, McGill-Queen’s 10 University Press, Montreal (2001): An essential book on risk communications, its promises and pitfalls.
- Michael Power, Organized Uncertainty: Designing a World of Risk Management, Oxford University Press, Oxford (2007): A sweeping analysis of the entire history and nature of risk management.
- George Head and Melanie Herman, Enlightened Risk Taking, Nonprofit Risk Management Center, Washington, DC (2002): One of the best, clearest and most concise statements of the process, intended for nonprofits but applicable to all organizations.
- Edward Tenner, Why Things Bite Back: Technology and the Revenge of Unintended Consequences, Vintage Books, New York (1996): A constant reminder than what we plan inevitably results in “unintended consequences.”
- John Fraser and Betty J. Simkins, editors, Enterprise Risk Management, John Wiley & Sons, Hoboken, NY (2010): a compendium of articles describing current practices in risk management.
- Paul Slovic, The Perception of Risk, Earthscan Publications, London (2000): analyses of why risk perceptions trump “expert” analyses.
- Nick Bostrom and Milan M. Cirkovic, Global Catastrophic Risks, Oxford University Press, Oxford (2008): a challenging look at the outliers.
- Duncan J. Watts, Everything Is Obvious, * once you know the answer, Crown Publishing, New York 2011. A deflation of the myth of “common sense” and an acknowledgement of the dynamic nature of unpredictability.
- Michael Shermer, The Believing Brain, Times Books, New York 2011. Yet another exploration of the irrationality of conventional “beliefs.”
- Daniel Kahneman, Thinking, Fast and Slow, Farrar, Straus and Giroux, New York 2011. A summary of Kahneman’s personal exploration of uncertainty: “an unbiased appreciation of uncertainty is a cornerstone of rationality.”
- Steven Pinker, The Better Angels of Our Nature: Why Violence Has Declined, Viking, New York 2011. A fascinating exploration of the steadily declining violence among the human species over the past 3000+ years, with dramatic implications for risk management.
- William Strunk, Jr. and E. B. White, The Elements of Style, Macmillan Publishing Co., New York (1979)’
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