The Failure of Risk Management Why It's Broken and How to Fix It

by Hubbard, Douglas W.

• ISBN13: 9780470387955
• ISBN10: 0470387955
• Format: Hardcover
• Copyright: 2009-04-27
• Publisher: Wiley

Summary

An essential guide to the calibrated risk analysis approachThe Failure of Risk Management takes a close look at misused and misapplied basic analysis methods and shows how some of the most popular "risk management" methods are no better than astrology! Using examples from the 2008 credit crisis, natural disasters, outsourcing to China, engineering disasters, and more, Hubbard reveals critical flaws in risk management methodsand shows how all of these problems can be fixed. The solutions involve combinations of scientifically proven and frequently used methods from nuclear power, exploratory oil, and other areas of business and government. Finally, Hubbard explains how new forms of collaboration across all industries and government can improve risk management in every field.Douglas W. Hubbard (Glen Ellyn, IL) is the inventor of Applied Information Economics (AIE) and the author of Wiley's How to Measure Anything: Finding the Value of Intangibles in Business (978-0-470-11012-6), the #1 bestseller in business math on Amazon. He has applied innovative risk assessment and risk management methods in government and corporations since 1994.

Author Biography

Douglas W. Hubbard is the inventor of Applied Information Economics (AIE). He is an internationally recognized expert in the field of measuring intangibles, risks, and value, especially in IT value, and is a popular speaker at numerous conferences. He has written articles for InformationWeek, CIO Enterprise, and DBMS magazine. His AIE method has been applied to dozens of large Fortune 500 IT investments, military logistics, venture capital, aerospace, and environmental issues. Doug is the author of How to Measure Anything: Finding the Value of Intangibles in Business (Wiley).

Table of Contents

Preface	p. xi
Acknowledgments	p. xv
An Introduction to the Crisis	p. 1
Healthy Skepticism for Risk Management	p. 3
Common Mode Failure	p. 4
What Counts as Risk Management	p. 8
Anecdote: The Risk of Outsourcing Drug Manufacturing	p. 11
What Failure Means	p. 16
Scope and Objectives of This Book	p. 18
Risk Management: A Very Short Introduction to Where We've Been and Where (We Think) We Are	p. 21
The Entire History of Risk Management (in 800 Words or Less)	p. 22
Methods of Assessing Risks	p. 24
Risk Mitigation	p. 26
The State of Risk Management According to Surveys	p. 31
How Do We Know What Works?	p. 37
An Assessment of Self-Assessments	p. 37
Potential Objective Evaluations of Risk Management	p. 42
What We May Find	p. 49
Why It's Broken	p. 53
The "Four Horsemen" of Risk Management: Some (Mostly) Sincere Attempts to Prevent an Apocalypse	p. 55
Actuaries	p. 57
War Quants: How World War II Changed Risk Analysis Forever	p. 59
Economists	p. 63
Management Consulting: How a Power Tie and a Good Pitch Changed Risk Management	p. 68
Comparing the Horsemen	p. 74
Major Risk Management Problems to Be Addressed	p. 76
An Ivory Tower of Babel: Fixing the Confusion about Risk	p. 79
The Frank Knight Definition	p. 81
Risk as Volatility	p. 84
A Construction Engineering Definition	p. 86
Risk as Expected Loss	p. 86
Risk as a Good Thing	p. 88
Risk Analysis and Risk Management versus Decision Analysis	p. 90
Enriching the Lexicon	p. 91
The Limits of Expert Knowledge: Why We Don't Know What We Think We Know about Uncertainty	p. 95
The Right Stuff: How a Group of Psychologists Saved Risk Analysis	p. 97
Mental Math: Why We Shouldn't Trust the Numbers in Our Heads	p. 99
"Catastrophic" Overconfidence	p. 102
The Mind of "Aces": Possible Causes and Consequences of Overconfidence	p. 107
Inconsistencies and Artifacts: What Shouldn't Matter Does	p. 111
Answers to Calibration Tests	p. 115
Worse Than Useless: The Most Popular Risk Assessment Method and Why It Doesn't Work	p. 117
A Basic Course in Scoring Methods (Actually, It's the Advanced Course, Too-There's Not Much to Know)	p. 118
Does That Come in "Medium"?: Why Ambiguity Does Not Offset Uncertainty	p. 123
Unintended Effects of Scales: What You Don't Know Can Hurt You	p. 130
Clarification of Scores and Preferences: Different but Similar-Sounding Methods and Similar but Different-Sounding Methods	p. 135
Black Swans, Red Herrings, and Invisible Dragons: Overcoming Conceptual Obstacles to Improved Risk Management	p. 145
Risk and Righteous Indignation: The Belief that Quantitative Risk Analysis Is Impossible	p. 146
A Note about Black Swans	p. 151
Frequentist versus Subjectivist	p. 158
We're Special: The Belief that Risk Analysis Might Work, But Not Here	p. 161
Where Even the Quants Go Wrong: Common and Fundamental Errors in Quantitative Models	p. 167
Introduction to Monte Carlo Concepts	p. 168
Survey of Monte Carlo Users	p. 172
The Risk Paradox	p. 174
The Measurement Inversion	p. 176
Where's the Science? The Lack of Empiricism in Risk Models	p. 178
Financial Models and the Shape of Disaster: Why Normal Isn't so Normal	p. 181
Following Your Inner Cow: The Problem with Correlations	p. 187
"That's Too Uncertain": How Modelers Justify Excluding the Biggest Risks	p. 191
Is Monte Carlo Too Complicated?	p. 195
How to Fix It	p. 199
The Language of Uncertain Systems: The First Step Toward Improved Risk Management	p. 201
Getting Your Probabilities Calibrated	p. 203
The Model of Uncertainty: Decomposing Risk with Monte Carlos	p. 208
Decomposing Probabilities: Thinking about Chance the Way You Think about a Budget	p. 212
A Few Modeling Principles	p. 213
Modeling the Mechanism	p. 215
The Outward-Looking Modeler: Adding Empirical Science to Risk	p. 221
Why Your Model Won't Behave	p. 223
Empirical Inputs	p. 224
Introduction to Bayes: One Way to Get around that "Limited Data for Disasters" Problem	p. 227
Self-Examinations for Modelers Who Care about Quality	p. 233
The Risk Community: Intra-and Extraorganizational Issues of Risk Management	p. 241
Getting Organized	p. 242
Managing the Global Probability Model	p. 244
Incentives for a Calibrated Culture	p. 250
Extraorganizational Issues: Solutions beyond Your Office Building	p. 254
Miscellaneous Topics	p. 256
Final Thoughts on Quantitative Models and Better Decisions	p. 258
Appendix Calibration Tests and Answers	p. 261
Index	p. 273
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