Douglas Hubbard on Pushing The Boundary In Risk Management
If you follow my ramblings you know I am a big fan of Douglas Hubbard’s work on risk management and especially his book, “How to Measure Anything.” He is currently offering a white paper covering “Pushing The Boundary: Risk Management Beyond Insurance”
From the white paper’s foreword:
1. Uncertainty can be assessed and measured, Even With Unknown Unknowns…if the object of measurement is well defined. “Even when faced with the perfect unknown unknowns, scenario analyses will frame the problem and help to reduce uncertainty.”
2. Establish early warning systems. Risk radars must be built into systems for continuous scanning. SEER-SEM’s monitoring and control is an example of early warning.
3. Prudent forecasting is possible and necessary. My favorite estimates (forecasts) are essential to reduce uncertainty. Forecasting should assume simple trends can’t be relied upon and that specifics should be identified and forecasted. “It is a first step toward mitigating the risk of being surprised by unknown unknowns, or the now proverbial black swan.”
4. Contingency planning is indispensable. “Since unknown unknowns keep generating surprises it is important to develop contingency plans that cover a whole range of scenarios.”
5. Resilience buffers will dilute adverse impacts. “Even the best risk assessment and most efficient forecasting cannot protect against the adverse impact of uncertainty. The challenge for risk managers will be to transfer the idea of resilience buffers to other areas in order to mitigate the adverse impacts of uncertainty.”
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