Last week (Jan. 25) at the Harvard Club in New York Aaron Brown, author of Red-Blooded Risk shared some of his thoughts on risk management at a high level by focusing on an aspect of risk management that does not get enough visibility: the risk introduced by systems that are meant to reduce risk. I put Aaron on the spot at the end of the presentation and asked him to sum up his advice in one statement, and his reply was to try to simplify.
Complex systems that are made more complex to address yet another risk element are more likely to cause more risk than is addressed by adding another feature.
Aaron highlighted the key points in his presentation using cars as an analogy. The old mechanical cars (think 1970s Volkswagen minibus) had steering controlled directly from the steering wheel to the tires. The brakes actually transmitted pressure from your foot to the brake pads, etc. Today’s cars are usually electronic – pressing the accelerator sends a signal to increase the flow of fuel through injectors; brakes are suggestions (with apologies to Toyota) for a Prius that might use a combination of braking processes, etc.
What is lost, Aaron said, is road feel.
In the same way, electronic markets have eliminated the trader on the floor getting feedback signals beyond just the information send through online news feeds. This feedback elimination needs to be understood. Electronic markets are speeding trading up, making it more efficient and lots of other good things, but there are downsides as well.
This is a subject that other authors have examined as well. In Outliers, Malcolm Gladwell uses the Iraq war as an example of how centralized decision systems based on complex computer based systems made problems worse instead of better when decision makers had a false sense of clarity of events on the ground. In Adapt, Tim Harford examines how complex safety systems can often be part of the problem (e.g. 3 Mile Island and the Piper Alpha disasters).
At Sybase we see the need for alternative monitoring capabilities external to the complex trading and risk systems available today. Our real-time analytics solutions can help build these monitoring systems – using Sybase ESP to keep track of activity in real-time. Sybase RAP and Sybase IQ can work in conjunction with SAP’s new HANA analytics solutions to store huge datasets and allow them to be analyzed at blindingly fast speeds to look for patterns of behavior not visible in the execution and risk systems, etc.
This is an interesting area, which I hope to continue to examine over the course of 2012.