Risk Management and Me

David Brooks, the wonderful columnist for the NY Times, said recently that the problems with the BP oil disaster and the Wall Street financial meltdown was that they were both a product of bad risk management.

Bad risk management? What does that mean?

I think of risk management as calculating the cost of losing. Like when I was a kid: I get into a fist fight, I think, of course, I'm going to win, and cost free, so I underestimate the potential cost of getting a broken jaw and going to the hospital AND the cost of the lawsuit that follows...because I miss-managed my risk--never considering the possibility of losing--by starting the fight in the first place. But that happened when I was a kid. When I didn't know how to manage my risk of fighting a guy three years older and fifty pounds heavier. Now that I'm grown up, I may still start fights, but I have an insurance policy to cover hospital stays, and a lawyer, in case I lose.

Risk management is nothing more than the old tried and true cost benefit analysis under another name. In the cost benefit analysis formula of decision-making, one first estimates the potential revenue of an action, then subtract the estimated calculated cost (hopefully both the present and future costs--and underestimating the future cost must really include the cost of losing, of making a mistake), and it gives you the potential profit of a situation.

The problem with BP and Wall Street--AND the Iraq war and probably the Afghan war as well--is that they underestimated the risk, the potential cost, of making a mistake. They though they were to smart to lose. They had stolen fire--in this case, high technology--from the Gods: guided bombs, computers and underwater robots. Since calculating risk is calculating what am I going to have to pay--money and lives--for the cleanup of one's mistake, one's loss. And if you never consider losing, well...

But--and I think this is the important thing--bad risk management is not just a problem of BP, Wall Street and the attack on Iraq, it is at the core of the whole socio-economic disaster that is the US (and Europe) today. After all, what is a sub-prime foreclosure but bad risk management on the part of both the banks and the individuals who took out the loan...and the government who both allowed and encouraged it: where the banks thought that "bundling," buying and selling of large groupings of sub-prime loans, made them risk free--there were no potential future costs. Similarly individuals took out sub-prime loans, thinking that housing prices were going to go up forever, and they could sell or get more high paying jobs or their rich Aunt would die and leave them a bundle before interest rates on their variable mortgages would ever go up. It is a society of bad risk-managers.

Moreover, what is procuring and using an individual credit card but a study in risk management: to properly assess one's future ability to pay off a loan. If we are bad risk-managers, however, we think/estimate that the future will always be better than the present, therefore we can borrow against it endlessly...never considering the possibility that the future will be worse.

We used to call good risk management "saving for a rainy day". Well, its pouring...and America's savings rate--or non-savings rate--hovered around zero more or less for the past few years, prior to the meltdown. That's called living through a rainstorm without having a raincoat, an umbrella or even, in some cases, a roof on the house.

So why should the public be so outrage over BP's failure, or Wall Street's, or Bush's, Cheney's and Rumsfeld's decision to go into Iraq, when those decision makers came from the the same cost-underestimating culture as the public. We American are all guilty of the lousy risk management...call it foresight blindness...we never considered for a moment the true cost of failure--the time required to to have systems and money available to correct for a future mistake: a oil wellhead breaking, the sub-prime bundling being a matter of mathematical-model hubris and mistaken calculation, or that the Iraqi Sunni insurgents being so tenaciously resistant and clever (we'll see about the Taliban in Afghanistan).

Leaders come from the same culture as the followers. And in a democracy--one man, one vote, remember--everyone is to blame. If you don't like the mess the Ivy League decision makers have gotten us into, vote for somebody from State College, USA. Or maybe better somebody who never went to college, but who knows that mistakes are possible, the future is never totally benign, contingencies must be prepared for, and greed, certainty and arrogance are the most expensive mistakes a society can make.

More from: Cafe au Lait

This following responses followed the arrest of two young people of color after they had, unprovoked, attacked an elderly white lady.

"San Francisco can't arrest its way out of this," said Joe Marshall, president of the San Francisco Police Commission.

"You have kids that are hurt, who don't have adult guidance. said Marshall, who is African-American, and directs Omega Boys Club, an organization that steers teenagers away from street violence. "They take that out on everybody. If you lock them up, they get out, do the same thing."

"From the African-American community's perspective, they feel like they're being invaded by outsiders, and they want to defend their own turf," said Edward Chang, a University of California, Irvine, professor who has studied race relations. "It invites a sense of resentment."

Just wondering: Would Edward and John have offered the same comments if the attackers were poor white skinheads attacking a black old lady in West Virginia?

And: Should they have, in either case. Is softening a response to a crime really a matter of mercy in sentencing and not a matter of adjudicating guilt or innocence. "Mercy must not steal from justice," someone once said.

From: Cafe au Lait

(Full disclosure: I am an olive-skinned Turkish-American, unforunately the census bureau keeps categorizing me as white.)

I hear more than a few African-Americans these days saying that all the socio-economic proplems of African-Americans in the US today is a result of slavery in pre-1965 America.

I sort of understand. I spent many years angry as a young boy and man because I was born poor, my father split from the house (leavinga piles of debts) when I was twelve, people made fun of me because I was fat, at sixteen I had rampant acne, no mopney to go to a skin dictor, I developed huge purple whelts on my face, causing me to hide my face when I met girls, finally had the pus and blood drained at nineteen only to leave scars on my face that have lasted a lifetime...etc., etc., etc.

Then one day I counted my blessings (i.e., my profits: revenue minus costs: after all, life is nothing if it is not a product of a cost benefit analysis)...being born in prosperous America (my father was an Turkish immigrant, and Turkey was not exactly a rich country to be poor in after the Ottoman Empire's disaster in WWI), inheriting a brain that got me A's in high sahool, being big enough to play football, getting a scholarship to college...eventually meeting a girl who didn't mind my scars, got a job acting where I turned lemons into lemonade: being heavy made me seem funny in comedy and scars were a plus in playing mean characters, parlayed those roles into a lifetime of nice living...etc., etc., etc.

A hypothetical thought enters my mind. Let's take all the descendants of slaves alive and well in America today; then measure their total socio-sconomic status against the living descendents of the Africans who came from the same class of people but weren't caught by slaver-traders and shipped to the US, those who successfully ran away and created thes modern-day African descendants; and then ask today's African-Americans: who is better off today--on average? The decendants of those who came to America as slaves, or the decendants of those who remained in Africa? Now I'm not saying that the slave-traders did the cauught slaves a favor by bringing them to America--many slaves died en route and suffered under the horrendous institution of slavery; the dead and enslaved--if they could be heard from the grave--have a legitimate, horrific and angering grievance--but I am addressing the present day descenants of slaves, and asking the question: which group living today has it better: the descendants of the slaves caught, or the descendants of those Africans who ran away and were left behind in Africa?

Look too strongly at yesterday, you run the risk of tripping over today, and you undermine tomorrow.

The Tea Party...Past and Present

I have been reading everywhere--pro and con--about the "Tea Party". The issue cannot be avoided. Many commentators say that the tea party is about nothing, just a bunch of old and middle-aged white people ranting about everything and nothing in particular.

Then I remember my school book readings about the original American "Tea Party" that soon led to the revolution that founded this country. One of the central unifying issues was "taxation without representation". The American colonies had been dealt a series of new taxes--culminating with a tax on tea. It seemed to be the straw that broke the camel's back. Newly arrived tea from Great Britain was dumped into the Boston harbor. (I read recently John Hancock was one of America's richest importers of tea. Little wonder he signed the Declaration of Independence with such a bold hand.)

The issue that unifies the present "Tea Party-ers" from their historical Boston cousins is not so much unwanted taxation, although that is a common thread, but the issue of non-representation.

The early colonists had no representation in the British Parliament. The Tea Party-ers feel they have no representation in the US Congress; their representatives have been more concerned with lobbyists interests than those of the common taxpayer. Thus the desire for a new revolution: "Throw (all) the bums out." Incumbents beware! That revolutionary cry is being heard today in several House and Senate races, and in all the polls. Instead of throwing tea overboard, all elected factotum are being grabbed by the legs and bottom, and their pain and fear is obvious...and well deserved.

I can't wait until November, 2010. Splash!

AMBITION

From a New Yorker article about S. A. Andree, an Arctric explorer who sought to become the first explorer to traverse the North Pole by flying a balloon over it. The balloon crashed, he and his two companions survived the crash, but died, freezing to death. He left a diary behind, discovered many years later by other explorers. In it he wrote:

"We think we can well face death, having done what we have done. Isn't it all, perhaps, the expression of an extremely strong sense of of individuality that cannot bear the thought of living and dying like a man in the ranks, forgotten by coming generations. Is this ambition? [italics mine]"

"Mirror, Mirror, on the wall..."

"...financial markets are like the mirror of mankind, revealing every hour of every working day the way we value ourselves and the resources of the world around us.
It is not the fault of the mirror if it reflects our blemishes as clearly as our beauty."
NIALL FERGUSON in his book, " The Ascent of Money".