Following the previous post, we are seeing a number of errors that commonly make when managing risk.
a deeply rooted in those who understand some risk is that this can be measured by standard deviations. We get an average, we estimate the deviation and the bigger the risk is higher. Perhaps the logic behind this belief is correct, but the truth is that the standard deviation indicates that in a world where few things are predictable about 2 / 3 of the changes on the average will fall within predictable limits (+1 / -1 standard deviation) and that changes beyond 7 times the standard is almost impossible, however, if we see real life in the last great stock market crash had movements that exceeded 30 times the estimated standard deviations for certain sectors bag. That is why you need risk analysis methods that do not use the standard deviation. Anyone seeking a number that represents the risk is looking for trouble.
Another concept that it is difficult to understand is the human paradox of mathematical understanding, which is numerically equivalent, psychologically it is not. For example, the reaction of people will probably be different if they are indicating they are likely to lose all your money in an investment only every 30 years, that if they are told they have a 3.3% probability of losing money each year. The same applies for example in airplane flights. A group of people were told that Statistics showed 1 accident every 1000 years. All said they would take the plane. Then another group were told they would fall off a flight in 1000. Only 70% wanted him to take. In both the probability of an accident was the same, just made differently.
Finally we have become accustomed to certain behaviors in companies misunderstood or taken to an inappropriate level can have profound effects. Do not tolerate redundancy, this is seen more as a waste, as if by subtracting value for shareholders. Nature teaches us that redundancy is sometimes necessary. Bodies fail us most usually the lungs and kidneys, nature gave us 2, it can survive with one. Redundancy in its purest form. Another concept that we have sold as positive leverage, it is not so, debt makes the company a higher percentage of weak, if we are highly indebted, we could end up losing everything if we are left without work? The same goes for companies, a high debt ratio can profoundly affect a lost sales target, the exchange rate fluctuations and interest rates change.
Another aspect is the over-specialization have even been theories that dictated that to achieve the optimum efficiency level of each country should strive to produce only one product where are the best. This theory obviously does not consider the abrupt, unexpected, such as climate change, drought for example.
One of the great myths of capitalism is that it is incentives. In fact the use of offsets increases the risks. Being rewarded can encourage executives to make decisions that bring the company to generate a profit percentage, but also taking a percentage of risk. Over the years would collect a lot of incentives, but falling into the risks that these decisions have generated executives to apologize, but of course, would not remove the incentives. Industry becomes increasingly more common to find CEOs with investors millionaires broken. Finally
remember, the greatest risk is within our perception of ourselves Over-estimate our abilities and under-estimate the things that we could make mistakes.
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Translated and based on the article The Six Mistakes Executives Make in Risk Management by Nassim N. Taleb, Daniel G. Goldstein and Mark W. Spitznagel. Harvard Business Review, October 2009.
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