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October 24, 2008
Books to Help With Understanding the Crisis and to Make Things Better
In past posts I've talked about various elements of psychology, behavioral finance and complexity as they can be applied to risk management and our organizations.
Risk is the change in value of a system or "thing". Value can go up or down. A risk event is the event that drives that change in value. Risk management, then, is the process of shaping how the system or "thing" changes in value in response to a risk event, but in a manner more to your liking.
Much of the success of risk management depends on how people perceive things, whether it be their worth today, or the uncertainty about their worth in the future. Successful risk management also depends on an understanding of how people interact in social systems and how the elements of complex systems interact to determine value.
In this particular environment, I find the lessons which I have learned from various books that address these areas to be quite on point. So, if you are looking for some reading that might not be on your normal list, here are four books to get you going on a new way of thinking about risk and risk management:
The Social Amplification of Risk
- to understand how risk events lead to changes in value that far exceed first order effects and how to manage them
The Perception of Risk
- to understand how people process information and react to risk
Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics
- an accessible introduction to complexity science and how it is going to change economics, finance and risk management forever
Complex Adaptive Systems: An Introduction to Computational Models of Social Life
- a slightly more technical introduction to how complex adaptive systems work
The texts above have helped to solidify the foundation for how I think about risk management and governance. The ultimate goal of these two disciplines is to allow our organizations to better attain their objectives, be they wealth creation, stakeholder service or both. The challenge facing each of us is to be willing to look at our work and our analysis from a different perspective and then to change that which can be done better.
Posted by dkoenig at October 24, 2008 02:32 PM
I strongly believe that in as much good these subjects/theories bring to the field of risk management, they equally harm the field by driving out people with required Emotional quotient but not the mathematical skill.
For example, for all the systems and models of credit risk management that have been designed, an officer who has spent 10-15 years at credit desk of any PSU bank here, can with almost 95% accuracy tell who will default over the next few years and guess what, they don't even know what skewness or kurtosis is!
You don't need to be at the fore front of cutting edge research to be an excellent or for that matter even a good one.
However, having said that these works certainly try and bridge the gap between us and ourselves and are appreciated.
Thanks for the recommendations, will look forward getting hold of some of these works despite the fact that you rarely can find anyone, here, to discuss these with.
Posted by: Mahesh at October 28, 2008 11:39 PM
Thank- you for sharing your thoughts and I believe that the recommended reading is very insightful and I would suggest that any quantitative risk assessment requires a comprehensive understanding of the qualitative elements involved within that quantitative risk assessment. I further recommend Mitroff's (2006) "Why some companies emerge stronger and better from a crisis" and Senge's (2006) "The Fifth Discipline" as relevant reading on the current issues in the financial markets.
Posted by: Kev at October 31, 2008 05:09 AM
I agree totally with the comments posted by Mahesh.
As someone with over 25 years of hands on lending experience in the field I have found that my cumulative experience built on insights into human behavior have proved far more useful than all the models developed to date.
Posted by: Kalyan Sunderam at October 31, 2008 05:12 AM
David's suggestion about trying different perspectives is critical to the success of our discipline. Try "Alice in Wonderland" again for insights into the human psyche as well as the poetry of Robert Frost, including his immortal "The Road Not Taken." Don't let the quants dominate our field!
Posted by: Felix Kloman at October 31, 2008 11:18 AM
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