Sunday, 26 April 2009

The Failure of Risk management

'"Well then, how will our state supply these needs? It will need a farmer, a builder, and a weaver, and also, I think, a shoemaker and one or two others to provide for our bodily needs. So that the minimum state would consist of four or five men...." (The Republic, Page 103, Penguin Classics edition.)

"When every individual person labours a-part, and only for himself, his force is too small to execute any considerable work; his labour being employ’d in supplying all his different necessities, he never attains a perfection in any particular art; and as his force and success are not at all times equal, the least failure in either of these particulars must be attended with inevitable ruin and misery. " (David Hume, A Treatise of Human Nature" (1739)):

These are two views on the division of labor. One speaks to its necessity for a wealthy and productive society, and the other to its destructive impact. I think the creation of Finance as an industry is an example of the former, whereas the creation of Risk Management as a sub-industry of Finance is an example of the latter.

Why do I think this? Well, it is to do with the separation of decision making, reward and responsibility.

Investors often talk about 'taking risk'. We choose to either 'take risk' or 'not take risk'. And responsibility for making a good decision lies with the decision maker.

To seperate the measurement or management of risk, from the decision to take the risk itself, not only confuses the responsibility, but dis-empowers the actors in the decision.
And creating adversarial environments between risk and profit (as most banks do) only puts risk in the junior position.

Therefore I think risk management is a discipline, not a profession. And as with mathematics, all should be literate and responsible in its practice. Risk cannot be delegated like Law, or Carpentry...

But worse than this is the scale such a division of labor between decision makers and 'professional reviewers' allows. Partly because it requires less training to reach 'competence' in one of the divorced skills, but also because of the sense of safety that such an organised and professionalised environment creates.

The failure then of risk managers (and I count myself very much in this) is that they, as individuals, submitted to, and encouraged this organisational slight of hand.

Wednesday, 22 April 2009

Science Fiction

Computers store data and process data. In addition we have the requirement to shift data around, from place to place and between processes and logical stores.

Over the years the physical implementation of this abstraction has itself become more and more abstract. On an individual machine the concepts of messages, processes, threads and serialization have allowed developers to build programmes that emulate the everyday language of life, through things like design patterns (producers, consumers, singletons, swim-lanes etc).

Technologies that are being created for the entire network of all computing power is assembling its (ingreasingly prosaic) nouns:
Cloud computing;
Cloud Base;

I think there are some missing, which relate to how data is moved
Which might be Zephyrs, Hurricanes, Eddies, TradeWinds etc...

But these types of metaphor allude to something that might be important. They are forces that we do not control, and indeed, we are at their mercy sometimes. In the technology world, we do direct these forces, but they require active input and deep thought to get right, and we are balancing strong forces, bridging the void in the difference of two large numbers.

In the human world we constantly make decisions about storage, communication and travel.
Sometimes we travel by airplane to the source of the data (face to face meetings transmit enormous amounts of data over a short distance) and sometimes we are content with text messages.

Cloud is part of an evolution of technical metaphoric language, and each baby step brings us closer to being face to face with our-selves...

Saturday, 18 April 2009


A conveyance of meaning to generate shared understanding.

I am sitting at my lap top writing this blog, chatting occasionally with my partner who is watching TV on the sofa, with tweets flashing in the top right of my screen, the odd beep of emails arriving and my blackberry sitting at my right hand (as always).

On radio four the other evening I heard Seamus Heaney saying he refused to have an email account, because letters were overwhelming, but text was something he used a lot, and had even learned to use predictive text (he is well into his 80s and recently had a stroke).

So we do lots of 'Communication' but sometimes these modes of communication don't suit us and sometimes they do. Text has taken off hugely because there is synergy between the technology and our desire to remain in touch with little emotional input. But amplifying this emotional shyness with technology doesn't always prove beneficial. We have all heard the story of redundancies delivered or relationships ended by text. So the technology beckons us over the line to cowardice in a painless way.

Twitter is another new communication phenomena. Until recently I would have loudly said it was a wasteful phenomena, encouraging pointless and trivial flirtations with 'almost communicating'. But I was ignoring an important truth about communication.

If its popular, it is important.

And I think it is a new way of communicating that doesn't have an analogue in the analogue world (ie email = letter, text = telegram, blog = essay). However, I think the next great advances in technology and communication will not be in new forms of communication, but in bending these forms into our service. Today, we are dominated and overwhelmed by information and are being communicated at, and to, in ways that don't obviously enhance our lives.

Allowing people to move between creative media, to collaborate, share and filter, using tools of their choice, to invite silence or hubub, in global teams or splendid isolation, or both in sequence, in ways that enhance our emotional and spiritual well-being, are aspirations that entrepreneurs today are working towards.

Sunday, 12 April 2009

Structural Change

Robert Peston makes a very interesting observation in his artcle 'The New Capitalism'.

One of the best ways of understanding how all our debts were accumulated is to look at the gross foreign current liabilities of our banks. These rose from £1,100bn in 1997 to £4,400bn this year (again, about three times the size of our annual economic output).

This only tells part of the story. If we want to know to what extent foreign investment in our banks has contributed to our UK based debt binge I think the following ratio would be more instructive:

I tried briefly to find the denomiator on google, but coudln't.

Anyone have any ideas where to find it?

Thursday, 9 April 2009

Rant on Infrastructure and Black Swans

/* Start Poorly Reasoned Rant */

Nicolas Taleb's Editorial in the FT yesterday is food for thought. ( )

Its a rehash of his black swan book, but with compressed messages and intensity.

One clause that stands out for me is the last:

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

Smaller companies, richer ecology, no leverage, equity.......

This is important stuff. But in this country (and probably everywhere) we lack the mindset and the infrastructure to really achieve this.

For many people small is cold. Small is lonely. Small is scary.
So we need to make it fluffier. Communities of small businesses can be improved. But not incubators in universities. Please no. That is a step too far! Too safe, too fluffy.
London has small enclaves of entrepreneurs, but is mostly dominated by the society of hedge funds and investment banks. Now is the time to change this (are you listening Boris!?).
We need more places like (check it out! Beats the pants off a serviced office).

Also we need to reduce the risk. At the moment equity goes into premises. Equity goes into Financial management. Equity goes into PR. It goes into infrastructure. And this is wasteful. Investors and politicians need to find ways of making this more efficient. I will be working on this with my small fund. So less equity to do the same thing means less risk, and more entrepreneurs. Simple!

Entrepreneurs should always share the downside. That's what makes it work. But the downside shouldnt involve having your family kicked out onto the street. That is not sustainable capitalism.

Unfortunately, and on the subject of housing, leverage has put us in a place where bricks, mortar and labor worth £150k costs £1m. This crazy mis-allocation of capital really needs to be reversed as part of building a sustainable capitalist society.

/* End Poorly Reasoned Rant */