Faster, more accurate decisions

DNA model
Many years ago we would never have thought that there is code that determines who we are. Now we understand that DNA is the ultimate example of structured information.
Thin slices of related information paint a composite picture

The way the human the brain serves up the right information in a split second is truly inspiring. How do you explain now retired Magic Johnson’s court sense and ability to float through a seemingly impossible line of guards and then sink a basket making it look like poetry in motion? How do you account for Wayne Gretzky’s renowned ability to anticipate where the puck will be at a critical moment?

Malcolm Gladwell in Blink uses examples like these to illustrate the brain’s capability to process thin slices of related information and make fast and accurate decisions. “Blink” is Gladwell’s metaphor for split second decision making.

This capability to thin slice accurately is based an acute understanding of what’s important and what’s not. The composite picture that the thin slice represents may include seemingly trivial information and exclude other information that just doesn’t fit. It’s the right bits of information and relationships between them that matters.

The concept applied to regulatory organizations, and in particular to the development of risk profiles, can be very effective.

Developing the picture of risk Regulatory organizations have an abundance of information about regulated parties. What may be lacking, however, is the ability to create a composite picture of risk. As in the Blink discussion, it may be that key pieces of information are missing, or that the relationships between different pieces of information are unclear. It may also be that too much information clouds the picture.

What’s the answer? It involves the creation of a specific information structure for assessing risk. This structure will be part of your overall risk framework. The structure supports a systematic collection of information together from various sources. It adds discipline to make sure that key information elements are included. It defines relationships between information. It eliminates the elements that are not germane.

Having this structure in place allows you to set up a process to continually improve the information set for making better decisions. It also sets the stage for the development of tools. Consider these examples of how this works in other domains.

Example #1: Warren Buffet’s approach to investing
This is a great example of systematic thinking in a risky field where fortunes have been won and lost.

Warren Buffet is the world’s most successful investor and his approach is called value investing. It consists of buying the stock of good companies that trade for less than their intrinsic value to profit from their long term performance. It pays close attention to the micro details of what makes a business successful and it largely ignores macro issues involving the business cycle, market timing, currency fluctuations and a whole category of generally distracting information.

The method has clarity so that decisions can easily be communicated and understood. The method is also rigorous and systematic. It doesn’t follow the crowd or use intuition. It’s a system that’s been validated through research and through many successful proponents, Buffet being the chief.

The approach is akin to the risk assessment that a regulator would make to determine the merit of a complaint or other report involving a regulated party. The information required to make a good decision can be defined. There are clear questions that need to be answered; people that need to be interviewed; information that needs to be analyzed.

You can read more about the approach in The Little Book of Value Investing byChristopher H. Browne.

Example # 2: Tools help create the picture
Last August, Information Week published a story What’s The Greatest Software Ever Written? Lists are fun and engaging and this is no exception. However, our interest in this list relates to the observation that many of the choices on this list provide users with tools to structure their thinking. The structure improves overall thinking and results. Here are just two familiar examples.

Microsoft Excel makes the list at number nine. It takes the simple idea of structuring information into rows and columns and provides sophisticated tools for working with the data. Excel is a tool that provides nearly immediate value to users no matter their level of skill. Its clear structure also supports clear thinking that’s further supported by rich programming tools and a good Help menu. Most organizations in the world would be severely handicapped without Excel.

The relational database and its SQL access language achieve the number two spot. This invention allows organizations to structure related information in a way that can be stored and then retrieved without remembering much about its content. All that’s need is one piece of identifying information that allows access to a set of information. The magic of the relational database is that it supports thinking about the information that’s needed and the relationships that form the composite picture of risk.

Example # 3: What about the imprecise realm of human emotion?
Structured information can even have an impact in the imprecise realm of human emotion and creativity. Here are two interesting examples.

Who would have thought that that someone could build a machine to predict hit movies. The machine is really a computer aided system for categorizing and ranking all emotional elements that relates to success at the box office. You can read about such a system in this New Yorker article.

J.S. Bach is the musician’s musician. He developed structured approaches for exploring the physics of music, demonstrating how melodies, rhythms, and pitches can produce joy or sadness. He did this in a way that his students could follow. This thinking approach has advanced and continues to advance music. His ideas are embedded in rock n’ roll, jazz, Chopin Etudes and much more.

You can read about his structured approach in Christoph Wolff book, Johann Sebastian Bach, The Learned Musician.

Structured information supports better risk management

Information can be structured to support many purposes. It works well in the area of risk management. The approach brings clarity to the task of what information is needed and what’s not needed. It helps reveal information gaps. It provokes more focused thinking about important relationships that may have been over looked. The development of tools is a logical follow-on step after the basic structured approach has been established. Tools help embed the structured risk-thinking process in the organization. If the tools have flexibility built into their design, they can also support continuous refinement of the approach.

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