Tag Archives: Risk

Updates from McKinsey

Managing the people side of risk
Companies can create a powerful risk culture without turning the organization upside down.
By Alexis Krivkovich and Cindy Levy – Most executives take managing risk quite seriously, the better to avoid the kinds of crises that can destroy value, ruin reputations, and even bring a company down. Especially in the wake of the global financial crisis, many have strived to put in place more thorough risk-related processes and oversight structures in order to detect and correct fraud, safety breaches, operational errors, and overleveraging long before they become full-blown disasters.

Yet processes and oversight structures, albeit essential, are only part of the story. Some organizations have found that crises can continue to emerge when they neglect to manage the frontline attitudes and behaviors that are their first line of defense against risk. This so-called risk culture is the milieu within which the human decisions that govern the day-to-day activities of every organization are made; even decisions that are small and seemingly innocuous can be critical. Having a strong risk culture does not necessarily mean taking less risk. Companies with the most effective risk cultures might, in fact, take a lot of risk, acquiring new businesses, entering new markets, and investing in organic growth. Those with an ineffective risk culture might be taking too little.

Of course, it is unlikely that any program will completely safeguard a company against unforeseen events or bad actors. But we believe it is possible to create a culture that makes it harder for an outlier, be it an event or an offender, to put the company at risk. In our risk-culture-profiling work with 30 global companies, supported by 20 detailed case studies, we have found that the most effective managers of risk exhibit certain traits—which enable them to respond quickly, whether by avoiding risks or taking advantage of them. We have also observed companies that take concrete steps to begin building an effective risk culture—often starting with data they already have. more>


Updates from McKinsey

How Gulf companies can overcome the five biggest challenges to their digital transformation
By Dany Karam, Christian Kunz, Jigar Patel, and Joydeep Sengupta – By now, most companies in the Gulf region understand the necessity of going digital. After all, 82 percent of the region’s population already owns smartphones.

Yet despite this awareness, progress on digital transformations among companies in the Gulf Cooperation Council (GCC) has been limited, at best.

Some companies have tested the waters, while others have moved more aggressively but haven’t scaled their programs. Many companies, however, are still sitting on the sidelines wondering how to move from strategy to action.

Almost no GCC companies have reached the end goal where analytics drives everything they do, agile operations and a culture of failing fast are the norm, and a mature and flexible technology stack is available to continually evolve offerings.

Regardless of where a company stands now, Gulf executives need to act quickly to move their organizations to the next level. Based on our work with incumbents in the Middle East and across the globe, we have identified five of the most common challenges GCC companies face when trying to go digital, as well as strategies for overcoming them and dramatically increasing the chances of success.

It’s understandable that Gulf executives would be reluctant to hit the go button on digital transformations. These efforts are largely new to the region, require considerable capital expenditures, and can lead to very different ways of working. You can’t transform only a little. Leading financial-services companies, for example, spend more than 4 percent of their revenues on digital transformations (with some spending as much as 9 to 12 percent). And digital transformations can go on for at least five years, with a breakeven point that can be one to four years away. more>


Updates from Chicago Booth

How to make money on Fed announcements—with less risk
By Dee Gill – Andreas Neuhierl and Michael Weber find gains of about 4.5 percent when investors bought or shorted markets in the roughly 40 days before and after Federal Open Market Committee (FOMC) announcements that ran counter to market expectations. Investors can make money on these “surprises,” even if they did not take positions before the announcements, the findings suggest.

Markets routinely forecast the content of FOMC announcements, which reveal the Fed’s new target interest rates, and usually react when the Fed does not act as expected. An FOMC announcement is an expansionary surprise when its new target rate is lower than the market forecasts and contractionary when it’s higher than expectations.

Share prices moved predictably ahead of and following both types of surprises, the study notes. Prices began to rise about 25 days ahead of an expansionary surprise, for about a 2.5 percent gain during that time. Before a contractionary surprise, prices generally fell. The researchers find that the movements occured in all industries except mining, where contractionary surprises tended to push share prices higher. more>


The Economics of Radical Uncertainty


The End of Alchemy: Money, Banking, and the Future of the Global Economy, Author: Mervyn King.
Other People’s Money, Author: John Kay.

By Clive Crook – The book asks deep, difficult questions about the theory and practice of finance and economics, and comes up with interesting answers every time.

They’re sobering answers too, in many cases, because they show how hard it will be for policy makers to avoid the next crisis.

The central idea is “radical uncertainty,” meaning the kind of uncertainty that statistical analysis can’t deal with. For risks you can precisely define and measure against historical data, you can calculate probabilities. That’s why the risk your house will burn down, for instance, is easily insurable.

But many possible outcomes can’t even be clearly imagined, let alone tested against the record — for example, how will the convergence of genetics and computer science affect the life expectancy of future generations?

Confronted with questions like that, you’re no longer dealing with quantifiable risk. more> http://goo.gl/rWjUBf

Scientists Can Now Watch the Brain Evaluate Risk

By Ed Yong – Many animals, including humans, bonobos, bees, and songbirds, tend to be risk-averse. But there are always individuals who gamble, who take chances, who consistently pursue uncertain large rewards over certain small ones.

Take a brain, turn it upside-down and prod its center: that’s the ventral tegmental area (VTA) and it contains neurons that produce dopamine, a chemical involved in feelings of reward and pleasure.

These dopamine-making cells extend into a deeper region called the nucleus accumbens (NAc), whose neurons carry docking stations that allow them to respond to dopamine. These stations are called receptors and they come in several types—D1, D2, D3, and so on.

These dopamine circuits have been strongly implicated in our attitudes to risk, and the way we deal with wins and losses. When something unexpectedly positive happens to us, it’s thought that neurons in the VTA release more dopamine, which is sensed by neurons in the NAc that carry the D2 receptor. The receptors react by shutting down. Conversely, when we’re disappointed, the VTA stops making dopamine for a hot second; this hiatus frees the NAc’s neurons, allowing them to fire.

So the D2-carrying neurons of the NAc could potentially act as loss detectors. They react when something falls short of our expectations. more> http://goo.gl/GYWNLn

How the FDIC can curb banks’ reckless speculation

By Barry Ritholtz – Let’s be blunt: Banking has devolved into an unruly mess.

After years of deregulation, it has become all but impossible to re-regulate modern banking. There was a brief window during the credit crisis, but that has passed. Today, profits trump soundness. Safety and security are secondary to risk-taking and speculation.

I have been wondering what we, as a democratic nation, are going to do about this. Are we going to rule banks, or are bankers going to rule us? more> http://tinyurl.com/cbeyqa4

In Praise Of Stretch Goals


Betterness: Economics for Humans (Kindle Single), Author: Umair Haque.

By Steve Denning – In an article  entitled The Folly of Stretch Goals, Daniel Markovitz writes, “Let’s dispense, once and for all, with the managerial absurdity known as ‘stretch goals.'”

Well, no! Instead, let’s celebrate stretch goals.

Markovitz’s article shies away from stretch goals for several reasons:

  • “Stretch goals can be terribly demotivating, overwhelming and unattainable”
  • “Stretch goals foster unethical behavior”
  • “Stretch goals can also — tragically — lead to excessive risk taking.”

Stretch goals need to be about human excellence, not about financial targets. Financial goals bring out the selfish gene that lurks in all of us. Instead, stretch goals need to appeal to what is best in us. more> http://is.gd/lMczMu