The ultimate risk for a public institution
A recent strike by Toronto Transit Commission workers presents an interesting case demonstrating how unexpected behaviour can swiftly damage reputation.
From sigh of relief to gasp of disbelief
Last week, city of Toronto residents, collectively, took a huge sigh of relief. The city and union officials, representing the Toronto Transit Commission (TTC) workers, had just negotiated a deal that promised to advert a crippling strike.
Granted, the deal had to be ratified by the union executive and accepted by members. However, given that the deal seemed generous, and that negotiations seemed long and arduous, most residents did not expect a strike. Union spokespersons had also made it clear that any possible strike would be preceded by 48 hours of notice.
So when transit workers walked off the job on Friday evening (April 25th 2008), without notice, creating havoc for thousands of people whose plans depended on the service, the collective sigh of relief became a gasp of disbelief. A diverse mixture of views and emotions about TTC workers, union leadership, and city officials got thrown into a public pot that started to brew early Saturday morning.
Here’s our review of Felix Kloman’s new book, The Fantods of Risk, Essays on Risk Management.
The word fantod is an unusual word, especially coming from an expert on risk management. Felix Kloman has practiced the discipline and written authoritatively on the subject for many years.
The word, which refers to a mind in a state of restlessness, has an interesting literary history. It’s been associated with some … well, restless characters: for instance, Charles Dickens memorable Mr. Pickwick and Mark Twain’s Huckleberry Finn. Here’s how Huck uses the word in a comment about the impact of his Aunt’s “pictures” on him:
“These was all nice pictures, I reckon, but I didn’t somehow seem to take to them, because if ever I was down a little, they always give me the fantods.”
Huck was at unease about the practices of a civilized world, which he viewed through the lens of superstitions and his unconventional experiences.
The word fantod in the title of this book, then, serves to remind readers who think they know a lot about risk that they should never delude themselves about uncertainty. It is inappropriate to feel certainty in the face of uncertainty. It’s reasonable, however, that risk should give you the fantods!
This is not an admission that risk management has little value. It’s a statement of conviction that, when confronted with risk, a know-it-all attitude must never super-cede inquiry, curiosity, careful thinking, and even some humility.
To reduce risk, expand your awareness of the risks and what’s happening in your jurisdiction
Bravado and confidence, admirable in some fields, can be disastrous if unchecked in high-risk professionals
In the past few months we’ve been reading about the public inquiry into Dr. Charles Smith, the Ontario pathologist whose questionable testimony led to wrongful convictions, and the financial scandal generated when French trader Jerome Kerviel evaded bank controls leading to the loss of 4.9 billion euros at Societe Generale SA.
The Dr. Smith case is particularly disturbing. Smith was a forensic child pathologist with no training in forensics – none was required or available in Canada when he rose to prominence. In frequent testimony as an expert witness, Smith, by his own admission, supported the prosecution in disregard of his obligation to provide balanced, objective testimony. Smith’s poor practices and mistakes, many of which date back to the early ’90s, resulted in wrongful imprisonment and financial and emotional devastation for several Ontario families.
Through the lens of risk management
The Smith (and Kerviel) examples illustrate how we are underestimating risk and using inadequate controls. Continue reading
What was he thinking! If it offends your mother, your family, your constituents, or your professional colleagues, don’t do it!
PERSONAL CONDUCT – WHAT’S THE HARM?
When senior officials or professionals behave contrary to society’s mores or expectations, they undermine the reputations of their office or profession as well as themselves.
Look no further than the top news story of the week, and this week it’s all about New York Governor, Eliot Spitzer. His professional reputation is in shreds, a reputation built as as N.Y. Attorney General and as a crusader against corporate wrong doing. In the parlance of a regulatory client, his behaviour is DDU (disgraceful, disgusting, unprofessional). Based on reports, the Governor used the services of a prostitution ring, repeatedly. What was he thinking? What damage has he done to the reputation of the institutions he leads?
There are character requirements for public office and professions. Some of these are embedded in law and others are implicit in society’s expectations. The intangibles – trust and confidence – make a difference to whether people will accept leadership, use services or take advice. Plus shocking news stories divert public attention from the business at hand.
The impact is real and the likelihood of human misbehaviour, it seems, is pretty high.
“Why Prediction Markets Beat Political Polls” is a headline on the cover of the March 2008 issue of Scientific American. The headline is a bit misleading because why or how prediction markets work is not all that clear. However, the fact that they outperform polls, based on the evidence of the Iowa Electronic Markets (IEM), is indisputable: The IEM example covering U.S. Federal elections between 1988 and 2004 demonstrates that markets beat polls 3 times out of 4. This is as true on the day of the election as it is 100 days in advance.
The basic distinction between polling and a prediction market, using the example of an election poll, is that the poll takes a representative sample to find out how the group is going to vote. Prediction markets allow a diverse group of people to predict (or bet) who’s going to win.
With risk-based regulation, there are times when the consequences of a wrong decision are high enough that a best guess isn’t good enough. Prediction markets, or information markets, as they are sometimes called, present a technique of tapping into the “wisdom of the crowds” to get a better reading. New types of markets can be developed to assist in regulatory decision making. Already, prediction markets have proven themselves in diverse areas such as disease forecasting, Hollywood box office success, and economic and financial forecasts.
Information Markets: A New Way of Making Decisions. This document captures the proceedings of a 2004 regulatory conference about information markets. The conference was hosted by the “Reg-Markets Center,” officially the AEI Center for Regulatory and Market Studies (formerly known as the AEI-Brookings Joint Center).
Our review of Wisdom of the Crowds by James Suroweicki.
There’s a review in the November 8, 2007 New York Review of Books of a book by the Turkish Nobel laureate Oran Pamuk, Other Colors: Essays and a Story. The reviewer quotes from an essay by Pamuk:
It is by reading novels, stories, and myths that we come to understand the ideas that govern the world in which we live; it is fiction that gives us access to the truths kept veiled by our families, our schools, and our society; it is the art of the novel that allows us to ask who we really are.
In another section, the reviewer again quotes Pamuk, “an imaginative novelist … can look directly into the center of things the way that only children can.” The child’s view is unconditioned by adults who may not see the obvious, or if they see it may have good reasons for keeping quiet about it. You’ll recall in the story of the Emperor’s Clothes that it was a child that revealed the veiled truth about the not so veiled Emperor, that he was buck naked. Continue reading
This is a book that offers the opportunity of an education. There are so many interesting tangents — they’re a bit like hyper-links that’ll take you into another world, the world of someone who has thought deeply and has experienced a life that’s anything but average. And to be sure this book is not about what’s average.
Nassim Nicholas Taleb argues that history is dominated not by the predictable but by the highly improbable. Before Europeans discovered the black swan in Australia, the world in the northern hemisphere believed there were only white swans. In fact, the expression “it’s a black swan” was a way to make a point about something being impossible. However, improbable and consequential events do exist outside our normal spheres of reference. Understanding the kind of impact these events can have on your plans, for good or bad, and being prepared is the central argument of this book. Taleb offers good advice. Continue reading