Fine Beim me…

We recently published a series of posts on the topic of how to improve decision-making and the accuracy of forecasting probabilities and risks, so we were intrigued to come across a copy of the so-called “Beim Report” into the quality and effectiveness of the FRBNY’s risk and bank supervision at the time of the post-2007 financial crisis. The report, although now some 4 years old, is worth reading in full; and we attach the link below.

https://s3.amazonaws.com/s3.documentcloud.org/documents/1303305/2009-08-18-frbny-report-on-systemic-risk-and.pdf

Tellingly, it was meant to be confidential within the FRBNY, presumably because it highlighted a number of organizational and cultural weaknesses within that institution that implicitly may have increased and exacerbated the probability and impact of the financial crisis. We have no desire to criticize or second-guess regulators, whose task is both critical and often thankless. However, we think it worthwhile to highlight a number of themes and recommendations, because they tend to support the thesis that developed in our previous posts.

• Reliance upon models and systems developed by others may be necessary in some circumstances, but unless one can be certain that the interests of those who created and developed them are aligned with one’s own, there is a real risk that one’s own judgment and assumptions will be affected by such reliance. In other words, there is a real risk that one’s thought-processes will frame questions in the same way, thereby reducing the vital element of independent and critical thinking
• Avoid being seduced by processes and how they are conducted. Of course, processes are essential in many ways, but it remains important to understand them and to question their validity and relevance
• Always remember the principal/agent dichotomy and whose interests are being served in any situation
• Remember that it can be “too quiet”, in the sense that the perception of reduced risk or low volatility often presages the opposite!
• Ensure that the comparisons and analogies you are making are relevant and valid
• While achieving consensus is often valuable, avoid ideas being “vetted to death”. At some point, one has to make a decision, even if information is imperfect
• Similarly, ensure that seeking consensus does not result in issues being whittled down, or controversies being smoothed over
• Try to overcome the dangers of information asymmetry; and ask what may not have been disclosed and why
• Be comfortable with your own judgment and with your opinions being challenged by robust peer-review
• Speak truth to power

None of the above is in any sense radical or esoteric. Rather it represents a further exhortation to independent and self-confident but also self-aware and self-critical decision-making and risk assessment- which is fine by us!

-The Awbury Team

Careful, your judgement is showing…

With all its complexity, the modern world often seems to resemble what Winston Churchill said of the old Soviet Union: “a riddle wrapped in a mystery inside an enigma”, with Kremlinology replaced by “Putinology”, or the equivalent in respect of, say, ISIS in the Middle East, or the outcome of debates within the Chinese Communist Party elite. What do they intend? How far will they go to achieve their aims, whether stated or unstated? What will be the impact and who will be affected? Markets move and decisions are made based upon how others analyze and assess such factors.

In the (re)insurance industry any underwriter or manager of risk is always making judgments and assessing probabilities, often based upon imperfect or asymmetric information; and trying to ensure that he or she does not makes a decision that causes losses which are so far outside the expected parameters as to threaten the viability of a business line, or even a company.

At Awbury, a key focus is to help our clients manage and mitigate risks that we characterize as economically catastrophic (hence our E-CAT franchise). As such, we take very seriously the process of how to identify, assess and judge the importance and probability of critical components of our risk assessment, because, if we are wrong in any material way, bad things will happen!

Therefore, we are students of the discipline of exercising judgment in a rational, dispassionate and effective manner; and try to read and explore widely relevant work and studies in the area. Many of our readers are probably familiar with Michael Lewis’ “Moneyball”, or the work of Nate Silver (e.g., summarized in “The Signal and the Noise”) on using observation and data to make effective, probabilistic decisions, but there is much beyond that.

Conversely, the (in)famous “gut instinct” can be a powerful factor in avoiding bad outcomes. However, it is not really an “instinct”, but rather a combination of knowledge, relevant experience and the ability to decide rather than procrastinate- which, strange as it may seem, is all too prevalent, particularly in large, hierarchical and bureaucratic organizations.

Somewhat paradoxically, there is by now ample evidence that so-called experts are often no better at assessing the probability of outcomes in areas in which they are supposedly “expert” than the proverbial dart-throwing monkey.

We shall explore this point, and how it can be addressed and managed,  in our next post.

In the meantime, ask yourself exactly how you make your own key decisions.

-The Awbury Team