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November 18, 2007
The Business Damage caused by Risk Management
[The following is an exceprt from the December issue of Risk Management Reports]
I had a very bad risk management experience recently. While traveling to New York City for a RIMS Board of Directors meeting, I used my credit card to check into the hotel.
Does anything about the preceding sentence sound odd to you? No? Well it should. According to the good and helpful people at my bank, using a credit card in New York City is a huge fraud indicator. So it is only logical that upon seeing a charge from a New York City hotel, they froze my account.
Yes, yes, I know what you are thinking, “Beaumont, you are a madman! How dare you use your credit card while traveling?” Trust me I promise I will never engage in this type of risky and insane behavior again. In the future, I will take the safer route of carrying at least $2,000 in cash through the streets of New York. Of course a simpler solution might be for banks to stop letting people with severe paranoia disorders make inflexible and idiotic risk management rules.
The true lesson here is that risk management that attempts to eliminate every risk, no matter how small or improbable, ends up causing more damage than no risk management at all. A credit card is useful precisely for things like travel to distant cities.
One could eliminate much credit card fraud loss by making credit cards largely unusable. Similarly we could eliminate most of the 44,000 automobile deaths in the USA by reducing the speed limit to 5 miles per hour. But at what price.
One races past the point of diminishing returns at one’s own peril.
Posted by beaumontv at November 18, 2007 09:06 PM
I totally agree with you here. I had a smilar experience while travelling in Argentina this March. They froze my credit card because I was trying to use the cash advance feature in a foreign country (I am from Canada). This caused me much pain as I was strapped for cash during my visit to one of the most beaufiul villages in Argentina, and I couldn't buy the souvenirs that I really liked. Not to mention it embarrassed me in front of the merchant who was very helpful and eager to help our purchase.
Posted by: Eric B. Chang at December 13, 2007 08:55 AM
Actually, this problem can often be avioded if you contact your bank before you travel. Since I don't travel that often, this is not a big effort.
The risk mgt policies are not that ``idiotic'' if you assume the communication link between you and your ``credit provider'' is not broken (or non-existent)
Posted by: Peter Wood at February 28, 2008 11:37 AM
Well, if I have to contact my bank before I make a purchase or travel, it is a collossal hassle. When I am preparing for a trip, I have plenty to do without contacting banks and hoping that they actually enter the data into the system.
But the bigger point is that there is a balance betwen good risk managment and creating disruptions. In a way the choice is often: a) take a loss today with a 100% chance of occurring or b) take the risk of a loss in the future with a much smaller chance.
Things like anti carjacking locks that lock car doors after 30 seconds whether or not you are in it (or have your keys) is a good example of risk management that causes an unacceptable loss now to prevent a future loss with an infinitesimal chance of occurrence.
With the bank, they are taking the real risk of angering their customer today in order to prevent a future loss. When they cross over into highly risk averse behavior, I move my business. So which loss is worse: the loss of all future cash flow from me, or a hotel charge?
Posted by: Beaumont at March 21, 2008 05:54 PM
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