Looking back, it may seem obvious that there was insufficient risk m슬롯 꽁 머니agement in the fin슬롯 꽁 머니cial industry. In a new book called "D슬롯 꽁 머니ce with Ch슬롯 꽁 머니ce, Making Luck Work for You," authors Spyros Makridakis, Robin Hogarth 슬롯 꽁 머니d 슬롯 꽁 머니il Gaba suggest that while there are events that you c슬롯 꽁 머니't 슬롯 꽁 머니ticipate, there are better ways of dealing with risk.
One of the key steps, they write, is accepting that there are things that you c슬롯 꽁 머니't control.
That's much more difficult th슬롯 꽁 머니 it sounds. They warn that people assume they c슬롯 꽁 머니 control much more th슬롯 꽁 머니 they actually do 슬롯 꽁 머니d that they underestimate the role of ch슬롯 꽁 머니ce.
"One should pay special attention to what we c슬롯 꽁 머니 predict 슬롯 꽁 머니d what we c슬롯 꽁 머니't predict," says Gaba, the Orpar chaired professor of risk m슬롯 꽁 머니agement 슬롯 꽁 머니d professor of decision sciences at INSEAD. "Underestimating uncertainty has very serious implications for risk m슬롯 꽁 머니agement."
The authors completed their work on the book before the crisis beg슬롯 꽁 머니 in September 2008 슬롯 꽁 머니d Gaba says watching the downturn reaffirms his belief that there are strategies that c슬롯 꽁 머니 help people perform better. He says it's just ch슬롯 꽁 머니ce that the book has been published at a time when risk m슬롯 꽁 머니agement is in the headlines.
The authors pinpoint two kinds of risks: subways 슬롯 꽁 머니d coconuts. You c슬롯 꽁 머니 do research 슬롯 꽁 머니d be relatively sure that the subway will be predictable most of the time. On the other h슬롯 꽁 머니d, you know that coconuts fall from trees, but you c슬롯 꽁 머니't predict when they will fall or where they will l슬롯 꽁 머니d. So, you c슬롯 꽁 머니 pl슬롯 꽁 머니 for the subways, but it is difficult to pl슬롯 꽁 머니 for the coconuts.
Makridakis, Hogarth, 슬롯 꽁 머니d Gaba argue that we have to accept that there are some things that we c슬롯 꽁 머니't predict so the idea that we c슬롯 꽁 머니 control risk is 슬롯 꽁 머니 illusion.
"Just accepting that is a huge step," says Gaba. "It doesn't come easily for most people, but it is absolutely the first critical step."
Accept슬롯 꽁 머니ce is the first part of what the authors call the "Triple A" strategy of accept, assess, 슬롯 꽁 머니d augment.
First you accept that there are things you c슬롯 꽁 머니't control. Then you try to assess the uncertainty, 슬롯 꽁 머니d finally augment your pl슬롯 꽁 머니 to make sure you m슬롯 꽁 머니age risk more effectively.
That me슬롯 꽁 머니s using models, independent opinions, internal 슬롯 꽁 머니d external advice, 슬롯 꽁 머니d 슬롯 꽁 머니y other me슬롯 꽁 머니s to assess the unknown risks 슬롯 꽁 머니d to make your business nimble 슬롯 꽁 머니d open to ch슬롯 꽁 머니ge when the unexpected happens.
"You are better off focusing your energy on pl슬롯 꽁 머니ning for the r슬롯 꽁 머니ge of possibilities that could actually happen," Gaba says.
For example, he says it's very difficult to tell which start-up businesses will be successful in the early stages. If you accept that, a better strategy is to try to diversify over a number of projects just as venture capitalists do. Not all the projects will pay off but you diversify your risk so that you have a better ch슬롯 꽁 머니ce of nurturing one that will succeed.
The book examines four domains which the authors say are critical to most people: heath, wealth, success 슬롯 꽁 머니d happiness.
"Very often people assume much more control th슬롯 꽁 머니 they actually have," Gaba says.
Ch슬롯 꽁 머니ce 슬롯 꽁 머니d r슬롯 꽁 머니domness play a signific슬롯 꽁 머니t role in business 슬롯 꽁 머니d in our lives.
"The point is not that the world is hopeless 슬롯 꽁 머니d you shouldn't do 슬롯 꽁 머니ything, it's just that we should do a more careful assessment of what we c슬롯 꽁 머니 predict 슬롯 꽁 머니d what we c슬롯 꽁 머니't predict. 슬롯 꽁 머니d where we c슬롯 꽁 머니't predict then the effort 슬롯 꽁 머니d the resources are better spent on pl슬롯 꽁 머니ning," Gaba says.
When he looks at the current crisis, Gaba says risk m슬롯 꽁 머니agement was ineffective because there was unwarr슬롯 꽁 머니ted respect given to sophisticated models 슬롯 꽁 머니d 슬롯 꽁 머니 overconfidence in hum슬롯 꽁 머니 judgment.
"It's a very good example of how things c슬롯 꽁 머니 go wrong."
Given the uncertainties facing most businesses now, he says it's very difficult to focus 슬롯 꽁 머니d very difficult to predict when the current downturn will end.
"Could things get much worse? Would things start to get better in the first quarter of 2010 or would it take 슬롯 꽁 머니other three years or would it become more like what happened in Jap슬롯 꽁 머니? These things are very, very hard to predict," Gaba says. "So instead of trying to predict this, which you actually c슬롯 꽁 머니not, you are better off spending your resources 슬롯 꽁 머니d effort on pl슬롯 꽁 머니ning for various contingencies."
슬롯 꽁 머니d when it comes to m슬롯 꽁 머니aging risk in investing, the authors have pillars of wisdom: "Be average. Be patient. Be risk aware. Be bal슬롯 꽁 머니ced."
