Friday 28 August 2015
BECOMING STRONGER THROUGH VULNERABILITY
Survivors Don’t Bottle Things Up If They Want To Live When people think of strength and grace under pressure, the image of the “strong, silent type” comes to mind. You know, the idea that really tough people can simply compartmentalize their lives and not let anything bother them, and that equates to being strong.
But that’s just not how it works. Bottling up your feelings and telling yourself you’ll just manage through them is a sure way to harden your heart and become less sensitive to the things that will give you a healthy ability to actually enjoy your life. I know, I spent a decade doing exactly that. I pretended that huge problems didn’t exist and that I could just “man up” and move on.
And I did move on … I just didn’t enjoy it. I became more closed in and unable to really connect with people. I finally had to go to counseling in college just to start unloading my stuff (because I was too afraid to be vulnerable in front of people I actually knew). Fortunately, the counselor was a good one, and helped me unpack some of the baggage I was carrying so I could move on.
Looking back, I wish I’d kept up with the counseling because I could have avoided a batch of rough spots I hit in the future.
Vulnerability Helps You Unpack Your Baggage The power of being vulnerable in front of of someone else you can trust comes from being open to the possibility that you can deal with your situation in a healthy way rather than just stewing in it. When you can open up to someone, you stop hiding behind “it’s okay” and “I’ll deal with it” and you really lay everything out in the open. And once everything’s out in the open, the whole power dynamic changes.
First off, you get a sense of relief from finally getting the words out of your head and out in front of someone. You don’t feel like you’re hiding your pain or pretending it doesn’t exist and though you may still feel helpless to deal with it, at least it’s uncoiling from your mind a little bit. This relief in itself can be palpable and liberating.
But more than that, when you really explain your pain to someone else, you get a more objective view of it. As the words come out of your mouth they have to be challenged by your “reality filter” (that part of you that realizes things don’t make as much sense when you actually say them out loud), and you realize that you’ve been giving certain things too much power.
As in you’ve been thinking something is hopeless when in reality, you know there’s hope. Or you think something is “impossible” when in reality, it’s just difficult, inconvenient and uncomfortable. Or when you think you have no choices when the truth of the matter is that you have plenty of them. It’s astounding how many problems we think are unbearable sound different simply by verbalizing them to another person.
And then dealing with them becomes something possible (I didn’t say easy, though) rather than impossible. And that feels good.
Vulnerability Gives You New Allies The greater power of vulnerability is that you gain allies, people who can look at your issues from an objective standpoint and offer you meaningful advice and support. If you can find people like this in your everyday life, it’s incredibly powerful to develop a meaningful relationship with them and to quit pretending “everything’s okay.” Pretending doesn’t make you a survivor, it makes you a stony husk of a person. And that doesn’t feel good at all.
But what if you don’t have anyone at all you can talk to? Then you were born at the right time, my friend, because the Internet is looking out for you. Regardless of what your issues is, it’s highly likely that there are at least a few online communities focused on gathering survivors together and supporting them. All you have to do is type your problem and the word “forum” or “group” or “discussion board” after it, and you’ll find a group of people you can be vulnerable to.
Does the thought of that scare the hell out of you? Then just create an anonymous online profile at these groups and nobody ever has to know who you are. Bare your (safely anonymous) soul and get the things out that have been weighing you down all these years. And ignore the random “haters” who will leave mean messages as a reply – they will be far outnumbered by good people who want to help you. Thanks to the internet, there’s no reason at all you can’t get the targeted, personal help you need. I only wish this had been around sooner.
Share Your Allies (Please) I know a lot of readers may be interested in the anonymous option, so if you know of a resource, forum, discussion group, or whatever that can help people, please leave a comment about it so others can find what they need more easily.
And if you just need to get it out, you can do that in the comments, too. Just leave a fake name and email address in the comment section and say that thing that’s been “unsayable” in your own heart. There’s no strength in pretending the problem isn’t there – or isn’t solvable. Get it out. This is your invitation. Get some relief today.
But that’s just not how it works. Bottling up your feelings and telling yourself you’ll just manage through them is a sure way to harden your heart and become less sensitive to the things that will give you a healthy ability to actually enjoy your life. I know, I spent a decade doing exactly that. I pretended that huge problems didn’t exist and that I could just “man up” and move on.
And I did move on … I just didn’t enjoy it. I became more closed in and unable to really connect with people. I finally had to go to counseling in college just to start unloading my stuff (because I was too afraid to be vulnerable in front of people I actually knew). Fortunately, the counselor was a good one, and helped me unpack some of the baggage I was carrying so I could move on.
Looking back, I wish I’d kept up with the counseling because I could have avoided a batch of rough spots I hit in the future.
Vulnerability Helps You Unpack Your Baggage The power of being vulnerable in front of of someone else you can trust comes from being open to the possibility that you can deal with your situation in a healthy way rather than just stewing in it. When you can open up to someone, you stop hiding behind “it’s okay” and “I’ll deal with it” and you really lay everything out in the open. And once everything’s out in the open, the whole power dynamic changes.
First off, you get a sense of relief from finally getting the words out of your head and out in front of someone. You don’t feel like you’re hiding your pain or pretending it doesn’t exist and though you may still feel helpless to deal with it, at least it’s uncoiling from your mind a little bit. This relief in itself can be palpable and liberating.
But more than that, when you really explain your pain to someone else, you get a more objective view of it. As the words come out of your mouth they have to be challenged by your “reality filter” (that part of you that realizes things don’t make as much sense when you actually say them out loud), and you realize that you’ve been giving certain things too much power.
As in you’ve been thinking something is hopeless when in reality, you know there’s hope. Or you think something is “impossible” when in reality, it’s just difficult, inconvenient and uncomfortable. Or when you think you have no choices when the truth of the matter is that you have plenty of them. It’s astounding how many problems we think are unbearable sound different simply by verbalizing them to another person.
And then dealing with them becomes something possible (I didn’t say easy, though) rather than impossible. And that feels good.
Vulnerability Gives You New Allies The greater power of vulnerability is that you gain allies, people who can look at your issues from an objective standpoint and offer you meaningful advice and support. If you can find people like this in your everyday life, it’s incredibly powerful to develop a meaningful relationship with them and to quit pretending “everything’s okay.” Pretending doesn’t make you a survivor, it makes you a stony husk of a person. And that doesn’t feel good at all.
But what if you don’t have anyone at all you can talk to? Then you were born at the right time, my friend, because the Internet is looking out for you. Regardless of what your issues is, it’s highly likely that there are at least a few online communities focused on gathering survivors together and supporting them. All you have to do is type your problem and the word “forum” or “group” or “discussion board” after it, and you’ll find a group of people you can be vulnerable to.
Does the thought of that scare the hell out of you? Then just create an anonymous online profile at these groups and nobody ever has to know who you are. Bare your (safely anonymous) soul and get the things out that have been weighing you down all these years. And ignore the random “haters” who will leave mean messages as a reply – they will be far outnumbered by good people who want to help you. Thanks to the internet, there’s no reason at all you can’t get the targeted, personal help you need. I only wish this had been around sooner.
Share Your Allies (Please) I know a lot of readers may be interested in the anonymous option, so if you know of a resource, forum, discussion group, or whatever that can help people, please leave a comment about it so others can find what they need more easily.
And if you just need to get it out, you can do that in the comments, too. Just leave a fake name and email address in the comment section and say that thing that’s been “unsayable” in your own heart. There’s no strength in pretending the problem isn’t there – or isn’t solvable. Get it out. This is your invitation. Get some relief today.
Thursday 27 August 2015
House of Dabira 2015 bridals
The team:
Photography: Ope Okunbor (@ope.okunbor)
Model: Merlin (@merlinuwalaka)
MUA: Oyinkan (@drhunnay)
Designer: Folu (@houseofdabira/ @aj_fidabira)
Graphic Designer: Wani (@waniajayi)
For the love of Photography by Kyng David
Kyng David.
For bookings: +2348030773273. kyngdavid77@gmail.com... bbm: 76674BED
www.beautyandmyaddiction.tumblr.com
Today I would like to feature some of the best works done by a photographers I think I know.. Ave been captured by his works and I think the world should also get to see his works.
Makeup: Shades and Silhouettes
photography: Kyng for Rapidfotos
nigerian photographer nigerian model makeup
Kim sparks 
Wednesday 22 April 2015
Come, Shop, Mingle! Dream Trading Luxury Home Accessories Store Presents The Fleur-De-Lis Mixer
On the 6th and 7th of December 2014, Dream Trading is hosting The Fleur-de-lis, an exclusive luxury home accessories event at the Social Place, Sinari Daranijo, Victoria Island. Shop and network in one unique event!
Dream Trading is a home, gardens and office accessories store that specializes in unique luxury pieces and antiques.
Dream Trading is owned and run by Annette Ibru, whose trained eye and exquisite taste have taken her all over the world in search of the most distinctive luxury home and office accessories available. Having been in the business for over fifteen years, the Dream Trading brand is synonymous with exotic pieces sourced from Paris to Belgium, London to Milan and beyond – in short, Dream Trading is the go to store for class, variety, quality and uniqueness in office, home and garden accessories.
If you’re anything like us, you’ll be thinking, “Great, but I can’t afford it.” Think again!! At Dream Trading, great taste is not defined by high price tags alone. From candlesticks to chandeliers, there’s something for every wallet.
Whether you’re looking to decorate your dream house, spruce up your office space, looking for a few affordable items to add a touch of class to your humble home, or searching for the perfect gift this holiday season: Dream Trading has you covered. Come, shop and mingle with like-minded people of equally exquisite taste!
Early-bird shoppers will enjoy complimentary tea, coffee, sandwiches, and up to 15 percent off selected items, while the night owls will be treated to great music, free cocktails – and, of course, great conversation. Day or night, “high brow” or humble, there’s something for everyone at Dream Trading.
Enjoy two full days of luxury shopping like you’ve never seen.
Date: 6th and 7th of December 2014
Venue: The Social Place, Sinari Daranijo
Time: 10am – 8pm
For more information, contact:
Dream Trading Store (Address): 38 Awolowo Road, Ikoyi, Lagos.
Phone: +234 805 471 2351 +234 709 800 6223
Email: info@dreamtrading.ng
Twitter: @dream_trading
Instagram: @dream_trading
Website: www.dreamtrading.ng
SHOP AND PLAY Presents Inception Featuring Mai Atafo Inspired – Sunday April 26th
With the Mai Atafo Inspired exhibition as the main attraction, the event will also feature Shop and Play in-house vendors Ad-Ons Accessories, Dyzn, Style Temple, Tiva Bespoke, Sidi Bespoke, Oxford Street Boutique, Selara Faces and Play Apparel offering an exciting variety of fashion & lifestyle products.
Shop and Play INCEPTION is a collaboration between The Showroom, Belvedere Vodka, George Okoro Photography and Shop n’ Play fashion and lifestyle lounge with a special focus on Mai Atafo’s work.
SHOP AND PLAY INCEPTION
When: Sunday 26th April 2015, 5PM.
Where: Ground Floor, Heroes Place, 145 Ademola Adetokunbo, Wuse 2, Abuja.
Contact: Zima 07030114040
The exhibition is powered by SHOP AND PLAY and supported by Belvedere Vodka and official Style Partners StyleVitae.
Follow SHOP AND Play on
Instagram @shopandplayng
Twitter @ShopandPlayng
Facebook Shop & Play
#9 THE LAW OF MAGNETISM- “Who You Are Is Who You Attract” Posted on February 17, 2015 by leapafrica
Be the kind of person that you want to meet.
How do the people you are currently attracting to your organisation or department look at you? Are they the strong, capable potential leaders you desire? Or could they be better? Remember, their quality does not ultimately depend on a hiring process, a human resource department, or even what you consider to be the quality of your area’s applicant pool. It depends on you. Who you are is Who you attract… That’s the Law of Magnetism.
In this law, Maxwell describes leaders as magnets. They are constantly attracting followers and often attracting new leaders to themselves. It is because of this that organizations experience growth. In other words, the people that wind up surrounding the leader are people similar in nature to him. So, if you’re negative all the time, don’t be surprise to get negative thinking people around.
“It’s possible for a leader to go out and recruit people unlike himself, but those are not the people he will naturally attract”
In most situations, you draw people to you who possess the same qualities you do. Maxwell continues with a set of characteristics:
Attitude: Rarely do positive and negative people attract one another. People who see life as a series of challenges and opportunities don’t want to spend time with people who complain about how bad life is all the time. Negative people find positive people often tedious and naive.Generation: People tend to attract others of the same age. If you are 30 and aggressive, you find people withing your age bracket that are 30 and aggressive.Background: People of the same or similar backgrounds tend to attract one another. You will naturally resonate with people who have a similar fund of experiences and background.Values: People are attracted to leaders whose values are similar to their own. It doesn’t matter whether the shared values are positive or negative. The attraction is always equally strong. Whatever character you possess you will likely find in the people who follow you.Life Experience: You’ll naturally be attracted to people or things you have exposed yourself to over time. This is where habits and what you do on a consistent basis come into play.Leadership Ability: The people you attract will have leadership ability similar to your own. As discussed in the Law of Respect, people follow leaders stronger than themselves. The leaders you attract will be similar in style and ability to you.
Who you are is who you attract. If you want to attract better people, become the kind of person you desire to attract.
Effective Leaders are always on the lookout for good people. What qualities do these people possess? What qualities are you looking for in the people you want to lead your organization or the people you want to follow? Make a list of the qualities you would like to see in the people on your team.
Who you get is not determined by what you want. It’s determined by who you are. Leaders draw people who are like themselves.
The better leader you are, the better leaders you will attract. If want to have better leaders around you, start with improving yourself first.
The empowering nature of the Law of Magnetism is the true beauty behind it. You can immediately take responsibility for your actions, thereby heavily influencing and changing the actions and results of those around you.
How do the people you are currently attracting to your organisation or department look at you? Are they the strong, capable potential leaders you desire? Or could they be better? Remember, their quality does not ultimately depend on a hiring process, a human resource department, or even what you consider to be the quality of your area’s applicant pool. It depends on you. Who you are is Who you attract… That’s the Law of Magnetism.
In this law, Maxwell describes leaders as magnets. They are constantly attracting followers and often attracting new leaders to themselves. It is because of this that organizations experience growth. In other words, the people that wind up surrounding the leader are people similar in nature to him. So, if you’re negative all the time, don’t be surprise to get negative thinking people around.
“It’s possible for a leader to go out and recruit people unlike himself, but those are not the people he will naturally attract”
In most situations, you draw people to you who possess the same qualities you do. Maxwell continues with a set of characteristics:
Attitude: Rarely do positive and negative people attract one another. People who see life as a series of challenges and opportunities don’t want to spend time with people who complain about how bad life is all the time. Negative people find positive people often tedious and naive.Generation: People tend to attract others of the same age. If you are 30 and aggressive, you find people withing your age bracket that are 30 and aggressive.Background: People of the same or similar backgrounds tend to attract one another. You will naturally resonate with people who have a similar fund of experiences and background.Values: People are attracted to leaders whose values are similar to their own. It doesn’t matter whether the shared values are positive or negative. The attraction is always equally strong. Whatever character you possess you will likely find in the people who follow you.Life Experience: You’ll naturally be attracted to people or things you have exposed yourself to over time. This is where habits and what you do on a consistent basis come into play.Leadership Ability: The people you attract will have leadership ability similar to your own. As discussed in the Law of Respect, people follow leaders stronger than themselves. The leaders you attract will be similar in style and ability to you.
Who you are is who you attract. If you want to attract better people, become the kind of person you desire to attract.
Effective Leaders are always on the lookout for good people. What qualities do these people possess? What qualities are you looking for in the people you want to lead your organization or the people you want to follow? Make a list of the qualities you would like to see in the people on your team.
Who you get is not determined by what you want. It’s determined by who you are. Leaders draw people who are like themselves.
The better leader you are, the better leaders you will attract. If want to have better leaders around you, start with improving yourself first.
The empowering nature of the Law of Magnetism is the true beauty behind it. You can immediately take responsibility for your actions, thereby heavily influencing and changing the actions and results of those around you.
Chess: A Valuable Teaching Tool for Risk Managers?
Chess
Written by IGOR POSTELNIK (FRM)
How does chess resemble risk analysis? Are there similarities, for example, between the way a chess player studies opponents’ games and the chessway a risk analyst studies clients’ portfolios? Igor Postelnik takes a comprehensive look at chess strategy and discusses the lessons that risk managers can learn from chess.
One of the most obvious features of financial markets is that prices move up and down unpredictably. This has led to random walk models that, in turn, suggest that practitioners should look for insight to games based on randomization: e.g., coin flips, dice rolls and card shuffles. In this article, I’d like to look at risk analysis from a chess master’s perspective. I’ll try to compare chess analysis to risk analysis and explain what risk management might learn from chess.
Although chess has no randomness or concealed information, it is nonetheless unpredictable. If two players sit down to play a game of chess, neither the game nor the result is the same as the game the same two players played yesterday.
Imagine a risk manager and a hedge fund manager trying to decide an appropriate leverage level for a portfolio and two opposing chess masters trying to decide how complicated they want their positions to be. Are there no similarities? Let’s see.
Just as higher leverage may enhance return or cause bigger loss for a risk manager or a hedge fund manager, a more complicated chess position may open unexpected variations that will lead to first-prize money or leave a player without a prize at all. Each chess move has advantages and disadvantages. While each move’s advantages include creating the possibility of a certain desirable future line of play, there is a risk that each move will open up possibilities for (perhaps unforeseen) lines of play that are desirable for the other side. Weighing the risks of this play and counterplay is the key to good judgment in chess and is really a type of risk management.
Before moving forward, let me dispel a myth that chess is a deterministic game with full information available to both players. In theory, this is true. However, in practice, it is hardly ever the case that a player sees all possibilities at once. And even if he or she actually sees them, it’s hard to predict how well an opponent will react to them. So, it comes down to probabilities: i.e., how likely is the opponent to know a certain opening or a certain type of a position?
For example, I am a 2200-rated chess player. Against someone rated below 2000, I definitely prefer to reach a simple position as soon as possible. Against someone rated above 2400, I want to keep the position very complicated for as long as possible.
As more pieces come off the board, the less room there is for calculations. Why does it matter? A simple position doesn’t require deep calculations but does require a deep understanding of strategy. Chess players, as their strength grows, learn to calculate first and understand later.
In risk management, an analyst takes a first look at a fund’s portfolio (chess position) and has to make a first move (approve for leverage). Once a certain level of leverage is approved (the first move is made), we have to consider how the portfolio manager will respond — as well as what factors will cause the trader to complicate the position (increase risk in the portfolio) and, when that happens, how the risk manager should respond.
There are other similarities between chess strategy and risk analysis. Under time pressure in a tough position, a chess player has to choose a move, while a risk manager has to choose a position in the portfolio to liquidate to meet a margin call when a portfolio is tanking. Chess players also study opponents’ games trying to anticipate how the next game will develop, while risk analysts study clients’ portfolios trying to anticipate how the next trade will affect
the portfolio.
Humans vs. Computers
A complicated chess position requires deep calculations and is more likely to cause a human player to make an error. The players understand this general guideline, but also study their future opponents’ games and try to pick a style that is least familiar to their opponent. In 1997, for example, while Garry Kasparov was preparing to play a computer, IBM programmers and chess advisers had adjusted Deep Blue to better analyze Kasparov’s previous games. The styles that are most effective for Kasparov are known in the chess world, so the computer program was fine-tuned to avoid playing such styles. By analogy, a computer risk model needs to be fine-tuned to better analyze styles a fund manager is more likely to use.
Deep Blue didn’t just play a game. It played against a specific opponent’s style, and Kasparov was embarrassingly crushed in the last game as a result. Similarly, a computer program may not treat a leverage request as too high without human understanding of the investment style behind the leverage request.
Now let’s discuss a “stress test.” It’s important to understand what happens when a chess player decides to sacrifice some pieces. The sacrifice is intended not to gain specific advantage but to create certain weaknesses in the position that the player will try to exploit later. A computer will accept the sacrifice and evaluate the current position in its favor, rather than considering the intent of the sacrifice. As the game progresses, the computer will treat an extra piece as a positive, even as its position deteriorates.
Consequently, the computer will not only miss the unexpected sacrifice but will also be unable to determine where the sacrifice would lead. Moreover, it certainly doesn’t give any thought as to why a human player would want to sacrifice at all. A human player, in contrast, might not accept sacrifice in the first place, in order not to be exposed to the opponent’s well-developed strategy.
Despite the fact that the world’s best chess players could barely manage to draw their matches against the best computer programs, average players are able to achieve decent results against the same programs by selecting inferior openings that would be ridiculed if played against other humans. The sole purpose of such openings is to create positions that rely more on deep comprehension of positional nuances than on the rough calculating power
of computers.
A human player knows that opening moves made are inferior, and it’s generally just a matter of time until he or she will eventually take advantage of them. A computer doesn’t recognize inferiority and has to prove errors by calculating. If calculations don’t reach far enough, the computer won’t select the correct strategy. Based on recent events, computer risk models, just like computer chess models, tend to ignore a piece of analysis that is not readily calculable — the piece that requires human understanding.
Keep in mind that all scenarios, at least in theory and no matter how improbable, are available on the chess board. Nevertheless, despite having superior quantitative ability, computers can’t pick them all. So, then, how can they account for all stress scenarios and calculate probabilities of events that never happened in finance? On the other hand, world champion chess players are known to make simple errors late in games because of fatigue and/or mental lapses, and computers do an excellent job in avoiding such errors.
The Art of the Sacrifice
One last strategy that is worthy of consideration is why a player is more likely to sacrifice at the opening of a match with black pieces rather than with white pieces. It is important to remember that with white pieces, he or she already has the advantage of the first move, and the goal is to keep that advantage and try to increase it. On the other hand, with black pieces, he or she is already behind, so why not sacrifice? It might help eliminate the first-move advantage.
Thinking about this from a risk management perspective, if a fund is outperforming its benchmark, why use more leverage? But if it’s underperforming, why not use more leverage?
A player may resort to sacrifices in time pressure, hoping that an opponent will make a mistake by calculating. The best way to avoid this is to exchange pieces. In the last game of the 1985 world championship, the world champion had to win to tie the match. From the first move, he launched an all-out attack. His opponent, Garry Kasparov, expected the attack and prepared in advance. Kasparov won the game and the title.
In the last game of the 1987 world championship, roles were reversed. Kasparov, as the world champion, had to win to keep the title. Not only did he not attack, he took a while to cross the middle of the board and stayed away from exchanging the pieces. His opponent was consequently forced to spend time calculating. Whenever he tried to simplify the position, Kasparov stayed back. As time began to run out, Kasparov’s opponent committed a few small errors that Kasparov was able to capitalize on, converting tiny positives into a decisive advantage.
Thus, using very little leverage, the world champion retained the crown. This game turned into a very valuable lesson for many players on how to approach must-win situations. The main lesson is that knowledge of an opponent’s strategy before the game can be crucial to the end result.
This type of knowledge can also prove to be quite useful in risk management. If we can determine, for example, what strategy a portfolio manager will choose next, proactive steps can be taken to keep a firm’s current portfolio exposure reasonable (even when current exposure does not seem excessive) and to avoid unnecessary calculations.
When models are insufficient, this knowledge can prove particularly helpful. Say, for example, a fund sells deep OTM naked puts. A stress-testing model would assign a value to a downside move and compare it to a fund’s equity. However, it wouldn’t know that the probability of the move changes daily, and it also wouldn’t take into account that something will always happen in the human world. Bobby Fischer was perhaps the best chess player ever, but not the greatest tactician. He proposed FischerRandom chess, which reduces computer knowledge and calculating power in general by selecting starting setups at random. Under such conditions, each human player will have more and less favorable starting setups. A computer won’t make such a distinction.
Computer programs are blind to human intentions and may not evaluate them correctly but do a great job in avoiding simple human blunders. Humans must specify opponents’ intentions correctly and base computer calculations on those intentions, regardless of whether the opponent is a chess grandmaster or a hedge fund manager.
Different Responses to Different Strategies In many ways, risks arising from randomness are the easiest to manage. If we flip a fair coin 100 times, for a $1 million bet each time, we know the distribution of outcomes and can plan accordingly. With financial markets, it’s more difficult, because the parameters of the distribution have to be estimated.
Risks arising from complex strategic interactions among competing (and in finance, but not chess, cooperating) entities require more subtle management. It is tempting to treat everything as random and then set a powerful computer to crank through all the calculations. This can work, as computer chess programs and successful program traders demonstrate. But it doesn’t always work.
Sometimes you have to consider the intentions of other entities and their responses to your moves. Sometimes the strategy that can be proven to be optimal with infinite computing resources (or perfect information) is a terrible strategy in practice. In these situations, a chess master may have better insights than a poker, bridge, backgammon or gin rummy champion.
Written by IGOR POSTELNIK (FRM)
How does chess resemble risk analysis? Are there similarities, for example, between the way a chess player studies opponents’ games and the chessway a risk analyst studies clients’ portfolios? Igor Postelnik takes a comprehensive look at chess strategy and discusses the lessons that risk managers can learn from chess.
One of the most obvious features of financial markets is that prices move up and down unpredictably. This has led to random walk models that, in turn, suggest that practitioners should look for insight to games based on randomization: e.g., coin flips, dice rolls and card shuffles. In this article, I’d like to look at risk analysis from a chess master’s perspective. I’ll try to compare chess analysis to risk analysis and explain what risk management might learn from chess.
Although chess has no randomness or concealed information, it is nonetheless unpredictable. If two players sit down to play a game of chess, neither the game nor the result is the same as the game the same two players played yesterday.
Imagine a risk manager and a hedge fund manager trying to decide an appropriate leverage level for a portfolio and two opposing chess masters trying to decide how complicated they want their positions to be. Are there no similarities? Let’s see.
Just as higher leverage may enhance return or cause bigger loss for a risk manager or a hedge fund manager, a more complicated chess position may open unexpected variations that will lead to first-prize money or leave a player without a prize at all. Each chess move has advantages and disadvantages. While each move’s advantages include creating the possibility of a certain desirable future line of play, there is a risk that each move will open up possibilities for (perhaps unforeseen) lines of play that are desirable for the other side. Weighing the risks of this play and counterplay is the key to good judgment in chess and is really a type of risk management.
Before moving forward, let me dispel a myth that chess is a deterministic game with full information available to both players. In theory, this is true. However, in practice, it is hardly ever the case that a player sees all possibilities at once. And even if he or she actually sees them, it’s hard to predict how well an opponent will react to them. So, it comes down to probabilities: i.e., how likely is the opponent to know a certain opening or a certain type of a position?
For example, I am a 2200-rated chess player. Against someone rated below 2000, I definitely prefer to reach a simple position as soon as possible. Against someone rated above 2400, I want to keep the position very complicated for as long as possible.
As more pieces come off the board, the less room there is for calculations. Why does it matter? A simple position doesn’t require deep calculations but does require a deep understanding of strategy. Chess players, as their strength grows, learn to calculate first and understand later.
In risk management, an analyst takes a first look at a fund’s portfolio (chess position) and has to make a first move (approve for leverage). Once a certain level of leverage is approved (the first move is made), we have to consider how the portfolio manager will respond — as well as what factors will cause the trader to complicate the position (increase risk in the portfolio) and, when that happens, how the risk manager should respond.
There are other similarities between chess strategy and risk analysis. Under time pressure in a tough position, a chess player has to choose a move, while a risk manager has to choose a position in the portfolio to liquidate to meet a margin call when a portfolio is tanking. Chess players also study opponents’ games trying to anticipate how the next game will develop, while risk analysts study clients’ portfolios trying to anticipate how the next trade will affect
the portfolio.
Humans vs. Computers
A complicated chess position requires deep calculations and is more likely to cause a human player to make an error. The players understand this general guideline, but also study their future opponents’ games and try to pick a style that is least familiar to their opponent. In 1997, for example, while Garry Kasparov was preparing to play a computer, IBM programmers and chess advisers had adjusted Deep Blue to better analyze Kasparov’s previous games. The styles that are most effective for Kasparov are known in the chess world, so the computer program was fine-tuned to avoid playing such styles. By analogy, a computer risk model needs to be fine-tuned to better analyze styles a fund manager is more likely to use.
Deep Blue didn’t just play a game. It played against a specific opponent’s style, and Kasparov was embarrassingly crushed in the last game as a result. Similarly, a computer program may not treat a leverage request as too high without human understanding of the investment style behind the leverage request.
Now let’s discuss a “stress test.” It’s important to understand what happens when a chess player decides to sacrifice some pieces. The sacrifice is intended not to gain specific advantage but to create certain weaknesses in the position that the player will try to exploit later. A computer will accept the sacrifice and evaluate the current position in its favor, rather than considering the intent of the sacrifice. As the game progresses, the computer will treat an extra piece as a positive, even as its position deteriorates.
Consequently, the computer will not only miss the unexpected sacrifice but will also be unable to determine where the sacrifice would lead. Moreover, it certainly doesn’t give any thought as to why a human player would want to sacrifice at all. A human player, in contrast, might not accept sacrifice in the first place, in order not to be exposed to the opponent’s well-developed strategy.
Despite the fact that the world’s best chess players could barely manage to draw their matches against the best computer programs, average players are able to achieve decent results against the same programs by selecting inferior openings that would be ridiculed if played against other humans. The sole purpose of such openings is to create positions that rely more on deep comprehension of positional nuances than on the rough calculating power
of computers.
A human player knows that opening moves made are inferior, and it’s generally just a matter of time until he or she will eventually take advantage of them. A computer doesn’t recognize inferiority and has to prove errors by calculating. If calculations don’t reach far enough, the computer won’t select the correct strategy. Based on recent events, computer risk models, just like computer chess models, tend to ignore a piece of analysis that is not readily calculable — the piece that requires human understanding.
Keep in mind that all scenarios, at least in theory and no matter how improbable, are available on the chess board. Nevertheless, despite having superior quantitative ability, computers can’t pick them all. So, then, how can they account for all stress scenarios and calculate probabilities of events that never happened in finance? On the other hand, world champion chess players are known to make simple errors late in games because of fatigue and/or mental lapses, and computers do an excellent job in avoiding such errors.
The Art of the Sacrifice
One last strategy that is worthy of consideration is why a player is more likely to sacrifice at the opening of a match with black pieces rather than with white pieces. It is important to remember that with white pieces, he or she already has the advantage of the first move, and the goal is to keep that advantage and try to increase it. On the other hand, with black pieces, he or she is already behind, so why not sacrifice? It might help eliminate the first-move advantage.
Thinking about this from a risk management perspective, if a fund is outperforming its benchmark, why use more leverage? But if it’s underperforming, why not use more leverage?
A player may resort to sacrifices in time pressure, hoping that an opponent will make a mistake by calculating. The best way to avoid this is to exchange pieces. In the last game of the 1985 world championship, the world champion had to win to tie the match. From the first move, he launched an all-out attack. His opponent, Garry Kasparov, expected the attack and prepared in advance. Kasparov won the game and the title.
In the last game of the 1987 world championship, roles were reversed. Kasparov, as the world champion, had to win to keep the title. Not only did he not attack, he took a while to cross the middle of the board and stayed away from exchanging the pieces. His opponent was consequently forced to spend time calculating. Whenever he tried to simplify the position, Kasparov stayed back. As time began to run out, Kasparov’s opponent committed a few small errors that Kasparov was able to capitalize on, converting tiny positives into a decisive advantage.
Thus, using very little leverage, the world champion retained the crown. This game turned into a very valuable lesson for many players on how to approach must-win situations. The main lesson is that knowledge of an opponent’s strategy before the game can be crucial to the end result.
This type of knowledge can also prove to be quite useful in risk management. If we can determine, for example, what strategy a portfolio manager will choose next, proactive steps can be taken to keep a firm’s current portfolio exposure reasonable (even when current exposure does not seem excessive) and to avoid unnecessary calculations.
When models are insufficient, this knowledge can prove particularly helpful. Say, for example, a fund sells deep OTM naked puts. A stress-testing model would assign a value to a downside move and compare it to a fund’s equity. However, it wouldn’t know that the probability of the move changes daily, and it also wouldn’t take into account that something will always happen in the human world. Bobby Fischer was perhaps the best chess player ever, but not the greatest tactician. He proposed FischerRandom chess, which reduces computer knowledge and calculating power in general by selecting starting setups at random. Under such conditions, each human player will have more and less favorable starting setups. A computer won’t make such a distinction.
Computer programs are blind to human intentions and may not evaluate them correctly but do a great job in avoiding simple human blunders. Humans must specify opponents’ intentions correctly and base computer calculations on those intentions, regardless of whether the opponent is a chess grandmaster or a hedge fund manager.
Different Responses to Different Strategies In many ways, risks arising from randomness are the easiest to manage. If we flip a fair coin 100 times, for a $1 million bet each time, we know the distribution of outcomes and can plan accordingly. With financial markets, it’s more difficult, because the parameters of the distribution have to be estimated.
Risks arising from complex strategic interactions among competing (and in finance, but not chess, cooperating) entities require more subtle management. It is tempting to treat everything as random and then set a powerful computer to crank through all the calculations. This can work, as computer chess programs and successful program traders demonstrate. But it doesn’t always work.
Sometimes you have to consider the intentions of other entities and their responses to your moves. Sometimes the strategy that can be proven to be optimal with infinite computing resources (or perfect information) is a terrible strategy in practice. In these situations, a chess master may have better insights than a poker, bridge, backgammon or gin rummy champion.
Managing people
Management
Written by Alexis Krivkovich
“Companies can create a powerful risk culture without turning the organization upside down”
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 culture1 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.
Traits of strong risk cultures
The most effective risk managers we have observed act quickly to move risk issues up the chain of command as they emerge, breaking through rigid governance mechanisms to get the right experts involved whether or not, for example, they sit on a formal risk-management committee. They can respond to risk adroitly because they have fostered a culture that acknowledges risks for what they are, for better or for worse; they have encouraged transparency, making early signs of unexpected events more visible; and they have reinforced respect for internal controls, both in designing them and in adhering to them.
Acknowledging risk
It takes a certain confidence among managers to acknowledge risks. Doing so—especially to the point of discussing them internally, as well as with shareholders or even regulators—requires that managers rely on their own policies and procedures to work through issues that could lead to crisis, embarrassment, or loss.
The cultural differences between companies that acknowledge risk and those that do not are quite stark. Consider, for example, two global financial institutions that take similar risks and share a similar appetite for risk. The first has built a culture, at all levels of the organization, that prizes staying ahead of the trend. This might mean convening a group of executive peers to discuss issues faced by the entire industry or responding to regulatory trends early—for example, on capital and liquidity requirements or compensation practices. The stance it takes is, “If we see it, identify it, and size it, then even if it’s horrible, we’ll be able to manage it.” Where risks cannot be sized, they are at least discussed in qualitative terms. The institution’s candor and its plans to rectify cultural issues in response to a number of risk incidents has won it the respect of regulators and built credibility with investors.
The second institution, in contrast, has a reactive and back-footed culture—one focused more on staying out of trouble, ensuring regulatory compliance, and making sure all the boxes are ticked. Its managers are generally content to move with the pack on risk issues, preferring to wait for regulatory criticism or reprimand before upgrading subpar practices. They are afraid of knowing what they don’t know, and they fear the reaction of the board, regulators, and investors. Many would rather ignore undesirable behaviors because they don’t know how to manage them and because managing them would demand time and might affect their cost base. This organization’s stance is, “Let’s wait until we really need to deal with these unpleasant things, because they’re anomalies that may turn out to be nothing at all.”
A separate institution had such a mind-set during the mortgage crisis. Managers did not trust their own models, which accurately predicted the severity of the issues to come. They knew that if the models were correct, they would be in more trouble than they knew how to handle, and so they found it easier to assume that the models were wrong—or to hope that the risk would crest and fall before the model’s estimates came true. Whether from fear or hubris, managers convinced themselves that they were safer than they really were. Even as the crisis developed, they were confident that they would not experience the mishaps befalling similar companies. In the end, the company’s refusal to acknowledge and address risk left it far more vulnerable than managers expected, and it was hit particularly hard.
Encouraging transparency
Managers who are confident that their organizational policies and controls can handle—and even benefit from—openness about risk are more likely to share the kinds of information that signal risk events and allow the institution to resolve emerging issues long before they become crises. This means they spot a risk issue developing and mobilize the organization to analyze and remedy it—at the board level if needed, and often within a few working days. In one situation, a division of an energy-services company was operating a contract in an emerging country in which it had not previously worked. There, the division discovered employment practices among subcontractors that ran counter to its own policies and practices. The operating leadership swiftly escalated the issue to the company’s global management board to decide whether specific contractors were acceptable. It was able to reallocate project tasks among contractors, manage timeline slippage and the budget, and consequently reduce the company’s employment-practices risk and safeguard project returns.
Companies with a culture that discourages such discussions—as well as those in which overconfidence leads to denial—are prone to ignoring or failing to recognize risks. In some cases, employees fear telling the boss bad news because they worry about the financial downside of slowing commercial progress, they know the boss doesn’t want to hear it, or they fear being blamed. As a result, they alert managers to risks only when further delay is impossible.
In other cases, companies promote practices that unintentionally reduce transparency regarding risk. For example, at one global pharmaceutical company, the culture thrives on competitive teams. Competitiveness is so strong that product-development teams use subtly different risk classifications so that their respective projects can’t be directly compared. To the teams, it can feel like good management to deal with issues close to home rather than raise them to higher levels—especially since revealing their true risks might place them at a disadvantage in the next planning round. For the company, though, this practice has obscured risks that were identified by one unit but went unnoticed by others, which continued to make errors that had been resolved elsewhere.
The best cultures actively seek information about and insight into risk by making it everyone’s responsibility to flag potential issues. For example, managers at one global oil-exploration company explicitly begin every meeting and interaction with a discussion about safety. Participants know they must be able to make an observation or raise a concern if called on randomly, which keeps them on the lookout for safety issues at all times. Most of the issues they raise are minor and easily addressed. But bigger questions often lead to longer conversations and inquiries from leadership, which clarify the problem and identify by name those responsible for resolving the issue.
Ensuring respect for risk
Most executives understand the need for controls that alert them to trends and behaviors they should monitor, the better to mobilize in response to an evolving risk situation. And while managers are unlikely to approve of skirting the very guidelines and controls they have put in place, some unintentionally promote situations and behaviors that undermine them. For example, while too few controls can obviously leave companies in the dark as a situation builds, too many can be even more problematic. Managers in such cases mistake more controls for tighter management of risk, though they may be inadvertently encouraging undesired behaviors. In one large hospital system, managers had implemented so many guidelines and controls for ward procedures that the staff saw them as impractical. As a result, they routinely circumvented them, and the culture became increasingly dismissive of all guidelines—not just the less practical ones—to the detriment of patients.
Even companies with the right number of controls in place encounter difficulty if managers do not monitor related trends and behaviors. Companies often unconsciously celebrate a “beat the system” mind-set, rewarding people who create new businesses, launch projects, or obtain approvals for things others cannot—even if it means working around control functions in order to get credit lines or capital allocations, for example.
In the best of cases, respect for rules can be a powerful source of competitive advantage. A global investment company had a comprehensive due-diligence process and sign-off requirements for investments. Once these requirements were fulfilled, however, the board was prepared to make large, early investments in asset classes or companies with the collective support of the senior-executive team, which was ultimately accountable for performance. Company-wide confidence in proceeding resulted from an exhaustive risk debate that reduced fear of failure and encouraged greater boldness relative to competitors. Confidence also stemmed from an appropriately gauged set of risk controls and an understanding that if these controls were followed, failure would not be regarded as a matter of poor decision making.
Building an effective risk culture
Companies that want to reshape their risk culture should be aware that patience and tenacity are crucial. Changing the operating environment of a large organization takes at least two to three years, as individuals come up against specific processes—such as policy decisions, project approvals, or even personnel reviews—that have changed in line with new risk-culture principles. In our observation, companies wrestle with two challenges: building consensus among senior executives and sustaining vigilance over time.
Finding consensus on culture
Improving a company’s risk culture is a group exercise. No one executive—or even a dozen—can sufficiently address the challenge. In most global organizations, CEOs and CFOs who want to initiate the process must build a broad consensus among the company’s top 50 or 60 leaders about the current culture’s weaknesses. Then they must agree on and clearly define the kind of culture they want to build. This is no small task, typically requiring agreement on four or five core statements of values about the desired culture that imply clear process changes. For example, in one organization, managers often adopted new products or took on new customers without considering whether the company’s infrastructure could support them. Often, it could not; this ran up costs and created huge operational risks. When leaders gathered to define the risk culture they wanted to see, one of their statements was, “We will always understand the infrastructure implications of the risk decisions we make.”
The consequence of committing to such statements is that the company will need to change the way it approves activities, whether those are transactions at banks, capital projects in heavy industry, or even surgical procedures at hospitals. It cannot let them proceed if the risk infrastructure does not support them—and business-unit COOs must be held accountable for risk events related to infrastructure in their areas. To make aspirations for the culture operational, managers must translate them into as many as 20 specific process changes around the organization, deliberately intervening where it will make a difference in order to signal the right behavior. In some companies, this has meant changing the way governance committees function or modifying people processes, such as training, compensation, and accountability. And while fine-tuning some of these areas may take a fair number of cycles, even a few symbolic changes in the first cycle can have a profound impact on the culture.
For example, in one global organization, a simple announcement that certain risk-related data would be incorporated into one round of promotions radiated through the organization almost overnight, encouraging some behaviors and discouraging others. In the next round of promotions, managers created reports using the data so that every staff member had tangible risk indicators next to his or her name. At that point, the new approach to risk started to become part of the infrastructure—sending loud signals to the organization about what would be celebrated and what would not. Although these were big changes, they were accomplished without turning the organization upside down.
Sustaining vigilance
Since cultures are dynamic by definition, sustaining the right attitudes and behaviors over time requires continuing effort. An ongoing risk committee might start off by keeping on top of key issues but become stale and mechanical as people lose energy over time. Or a discontinuity—new leadership or a new set of market pressures, for instance—could send the culture in a different direction. To monitor for such shifts and make sure things continue moving in the right direction, managers at one pharmaceutical company conduct spot-checks every year on employee attitudes and minor risk infractions.
The responsibility for maintaining the new risk culture extends to boards of directors, which should demand periodic reviews of the overall company and individual businesses to identify areas that merit a deeper look. This need not be complicated. Indeed, most companies can aggregate existing data: a people survey, which most companies conduct, can provide one set of indicators; a summary of operational incidents, information on financial performance, and even customer complaints can also be useful. Combined, these data could be displayed in a dashboard of indicators relevant to the company’s desired risk culture and values. Such a review process should become part of the annual risk strategy on which the board signs off.
Obviously, a shortage of risk consciousness will lead to trouble. But it is all too easy to assume that a thorough set of risk-related processes and oversight structures is sufficient to avert a crisis. Companies cannot assume that a healthy risk culture will be a natural result. Rather, leadership teams must tackle risk culture just as thoroughly as any business problem, demanding evidence about the underlying attitudes that pervade day-to-day risk decisions.
Written by Alexis Krivkovich
“Companies can create a powerful risk culture without turning the organization upside down”
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 culture1 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.
Traits of strong risk cultures
The most effective risk managers we have observed act quickly to move risk issues up the chain of command as they emerge, breaking through rigid governance mechanisms to get the right experts involved whether or not, for example, they sit on a formal risk-management committee. They can respond to risk adroitly because they have fostered a culture that acknowledges risks for what they are, for better or for worse; they have encouraged transparency, making early signs of unexpected events more visible; and they have reinforced respect for internal controls, both in designing them and in adhering to them.
Acknowledging risk
It takes a certain confidence among managers to acknowledge risks. Doing so—especially to the point of discussing them internally, as well as with shareholders or even regulators—requires that managers rely on their own policies and procedures to work through issues that could lead to crisis, embarrassment, or loss.
The cultural differences between companies that acknowledge risk and those that do not are quite stark. Consider, for example, two global financial institutions that take similar risks and share a similar appetite for risk. The first has built a culture, at all levels of the organization, that prizes staying ahead of the trend. This might mean convening a group of executive peers to discuss issues faced by the entire industry or responding to regulatory trends early—for example, on capital and liquidity requirements or compensation practices. The stance it takes is, “If we see it, identify it, and size it, then even if it’s horrible, we’ll be able to manage it.” Where risks cannot be sized, they are at least discussed in qualitative terms. The institution’s candor and its plans to rectify cultural issues in response to a number of risk incidents has won it the respect of regulators and built credibility with investors.
The second institution, in contrast, has a reactive and back-footed culture—one focused more on staying out of trouble, ensuring regulatory compliance, and making sure all the boxes are ticked. Its managers are generally content to move with the pack on risk issues, preferring to wait for regulatory criticism or reprimand before upgrading subpar practices. They are afraid of knowing what they don’t know, and they fear the reaction of the board, regulators, and investors. Many would rather ignore undesirable behaviors because they don’t know how to manage them and because managing them would demand time and might affect their cost base. This organization’s stance is, “Let’s wait until we really need to deal with these unpleasant things, because they’re anomalies that may turn out to be nothing at all.”
A separate institution had such a mind-set during the mortgage crisis. Managers did not trust their own models, which accurately predicted the severity of the issues to come. They knew that if the models were correct, they would be in more trouble than they knew how to handle, and so they found it easier to assume that the models were wrong—or to hope that the risk would crest and fall before the model’s estimates came true. Whether from fear or hubris, managers convinced themselves that they were safer than they really were. Even as the crisis developed, they were confident that they would not experience the mishaps befalling similar companies. In the end, the company’s refusal to acknowledge and address risk left it far more vulnerable than managers expected, and it was hit particularly hard.
Encouraging transparency
Managers who are confident that their organizational policies and controls can handle—and even benefit from—openness about risk are more likely to share the kinds of information that signal risk events and allow the institution to resolve emerging issues long before they become crises. This means they spot a risk issue developing and mobilize the organization to analyze and remedy it—at the board level if needed, and often within a few working days. In one situation, a division of an energy-services company was operating a contract in an emerging country in which it had not previously worked. There, the division discovered employment practices among subcontractors that ran counter to its own policies and practices. The operating leadership swiftly escalated the issue to the company’s global management board to decide whether specific contractors were acceptable. It was able to reallocate project tasks among contractors, manage timeline slippage and the budget, and consequently reduce the company’s employment-practices risk and safeguard project returns.
Companies with a culture that discourages such discussions—as well as those in which overconfidence leads to denial—are prone to ignoring or failing to recognize risks. In some cases, employees fear telling the boss bad news because they worry about the financial downside of slowing commercial progress, they know the boss doesn’t want to hear it, or they fear being blamed. As a result, they alert managers to risks only when further delay is impossible.
In other cases, companies promote practices that unintentionally reduce transparency regarding risk. For example, at one global pharmaceutical company, the culture thrives on competitive teams. Competitiveness is so strong that product-development teams use subtly different risk classifications so that their respective projects can’t be directly compared. To the teams, it can feel like good management to deal with issues close to home rather than raise them to higher levels—especially since revealing their true risks might place them at a disadvantage in the next planning round. For the company, though, this practice has obscured risks that were identified by one unit but went unnoticed by others, which continued to make errors that had been resolved elsewhere.
The best cultures actively seek information about and insight into risk by making it everyone’s responsibility to flag potential issues. For example, managers at one global oil-exploration company explicitly begin every meeting and interaction with a discussion about safety. Participants know they must be able to make an observation or raise a concern if called on randomly, which keeps them on the lookout for safety issues at all times. Most of the issues they raise are minor and easily addressed. But bigger questions often lead to longer conversations and inquiries from leadership, which clarify the problem and identify by name those responsible for resolving the issue.
Ensuring respect for risk
Most executives understand the need for controls that alert them to trends and behaviors they should monitor, the better to mobilize in response to an evolving risk situation. And while managers are unlikely to approve of skirting the very guidelines and controls they have put in place, some unintentionally promote situations and behaviors that undermine them. For example, while too few controls can obviously leave companies in the dark as a situation builds, too many can be even more problematic. Managers in such cases mistake more controls for tighter management of risk, though they may be inadvertently encouraging undesired behaviors. In one large hospital system, managers had implemented so many guidelines and controls for ward procedures that the staff saw them as impractical. As a result, they routinely circumvented them, and the culture became increasingly dismissive of all guidelines—not just the less practical ones—to the detriment of patients.
Even companies with the right number of controls in place encounter difficulty if managers do not monitor related trends and behaviors. Companies often unconsciously celebrate a “beat the system” mind-set, rewarding people who create new businesses, launch projects, or obtain approvals for things others cannot—even if it means working around control functions in order to get credit lines or capital allocations, for example.
In the best of cases, respect for rules can be a powerful source of competitive advantage. A global investment company had a comprehensive due-diligence process and sign-off requirements for investments. Once these requirements were fulfilled, however, the board was prepared to make large, early investments in asset classes or companies with the collective support of the senior-executive team, which was ultimately accountable for performance. Company-wide confidence in proceeding resulted from an exhaustive risk debate that reduced fear of failure and encouraged greater boldness relative to competitors. Confidence also stemmed from an appropriately gauged set of risk controls and an understanding that if these controls were followed, failure would not be regarded as a matter of poor decision making.
Building an effective risk culture
Companies that want to reshape their risk culture should be aware that patience and tenacity are crucial. Changing the operating environment of a large organization takes at least two to three years, as individuals come up against specific processes—such as policy decisions, project approvals, or even personnel reviews—that have changed in line with new risk-culture principles. In our observation, companies wrestle with two challenges: building consensus among senior executives and sustaining vigilance over time.
Finding consensus on culture
Improving a company’s risk culture is a group exercise. No one executive—or even a dozen—can sufficiently address the challenge. In most global organizations, CEOs and CFOs who want to initiate the process must build a broad consensus among the company’s top 50 or 60 leaders about the current culture’s weaknesses. Then they must agree on and clearly define the kind of culture they want to build. This is no small task, typically requiring agreement on four or five core statements of values about the desired culture that imply clear process changes. For example, in one organization, managers often adopted new products or took on new customers without considering whether the company’s infrastructure could support them. Often, it could not; this ran up costs and created huge operational risks. When leaders gathered to define the risk culture they wanted to see, one of their statements was, “We will always understand the infrastructure implications of the risk decisions we make.”
The consequence of committing to such statements is that the company will need to change the way it approves activities, whether those are transactions at banks, capital projects in heavy industry, or even surgical procedures at hospitals. It cannot let them proceed if the risk infrastructure does not support them—and business-unit COOs must be held accountable for risk events related to infrastructure in their areas. To make aspirations for the culture operational, managers must translate them into as many as 20 specific process changes around the organization, deliberately intervening where it will make a difference in order to signal the right behavior. In some companies, this has meant changing the way governance committees function or modifying people processes, such as training, compensation, and accountability. And while fine-tuning some of these areas may take a fair number of cycles, even a few symbolic changes in the first cycle can have a profound impact on the culture.
For example, in one global organization, a simple announcement that certain risk-related data would be incorporated into one round of promotions radiated through the organization almost overnight, encouraging some behaviors and discouraging others. In the next round of promotions, managers created reports using the data so that every staff member had tangible risk indicators next to his or her name. At that point, the new approach to risk started to become part of the infrastructure—sending loud signals to the organization about what would be celebrated and what would not. Although these were big changes, they were accomplished without turning the organization upside down.
Sustaining vigilance
Since cultures are dynamic by definition, sustaining the right attitudes and behaviors over time requires continuing effort. An ongoing risk committee might start off by keeping on top of key issues but become stale and mechanical as people lose energy over time. Or a discontinuity—new leadership or a new set of market pressures, for instance—could send the culture in a different direction. To monitor for such shifts and make sure things continue moving in the right direction, managers at one pharmaceutical company conduct spot-checks every year on employee attitudes and minor risk infractions.
The responsibility for maintaining the new risk culture extends to boards of directors, which should demand periodic reviews of the overall company and individual businesses to identify areas that merit a deeper look. This need not be complicated. Indeed, most companies can aggregate existing data: a people survey, which most companies conduct, can provide one set of indicators; a summary of operational incidents, information on financial performance, and even customer complaints can also be useful. Combined, these data could be displayed in a dashboard of indicators relevant to the company’s desired risk culture and values. Such a review process should become part of the annual risk strategy on which the board signs off.
Obviously, a shortage of risk consciousness will lead to trouble. But it is all too easy to assume that a thorough set of risk-related processes and oversight structures is sufficient to avert a crisis. Companies cannot assume that a healthy risk culture will be a natural result. Rather, leadership teams must tackle risk culture just as thoroughly as any business problem, demanding evidence about the underlying attitudes that pervade day-to-day risk decisions.
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