Risk Management and Business Realities
How attitude shapes models in forecasting
How attitude shapes models in forecasting
Markets are able to digest and take into account both good as well as bad news. However, markets are not able to digests or tolerate uncertainty. The uncertainty as to the causes and effects of the current global economic slowdown coupled with the uncertainty as to the right action that needs to be taken by governments, businesses and consumers to remedy the economic weaknesses that exist continue to make forecasting of business risk clouded by data which does not seem to fit into accepted risk modals.
Perhaps there is an element of truth in George Soros’s contention that markets are shaped by alchemy, as we realize that business decisions are very often made without all the facts available for risk analysis. As regulatory frameworks for financial systems converge globally, ideology or attitude may increasingly distort outlook and therefore financial and commercial decision making.
Risk forecasting used to be relatively straightforward. Utilizing the first quarter financial and sales figures, managers could quite reliably predict how the business was developing and whether targets could be met, missed or exceeded. Confidence in such predictions reached a point where any deviation above or below the predicted figure could impact share value positively or negatively depending on the figures.
The uncertainty in the direction of the global economy has shaken confidence in such market projections. This increasingly results in an unwillingness of managers to make predictions of risk and could lead to a paralysis in the conduct of business. Standing still is not an option for businesses and decisions have to be made for continued business success.
The core issue is in understanding and managing risk. There is no guarantee of success for every business decision made. The complex models for evaluating financial and commercial risk need to be re-examined. The variables of possible and probable outcomes based on historical performance appear not to have predicted or prepared companies for the present global economic slowdown. So do we need to redesign these risk models? The models may not have failed us rather the internal attitude or corporate culture may have been to ignore information in the euphoria of a booming global economy that seemed on a forever upward trajectory. Free markets appeared to have freed businesses from national economic regulation that was seen as an out-dated socialist ideological burden. But free markets cannot mean a free for all leading to recklessness.
Companies may as a consequence have to re-examine historical data that went into their risk management modals with a fresh focus on the ethics of how information and data was evaluated for risk. Ideological distortions have no place in the market. Ideals of social responsibility and market efficiency in delivering what the consumer wants need to be fed into the risk management modal. When an assumption changes, risk evaluation must take it into account.
An approach taking into account “sovereign risk” based on the political ideology prevailing in a nation state such as socialism in Venezuela, as well as “operational risk” where internal operational disputes can affect performance as in the case of delays in the launch of the 380 jet by Airbus will help us understand how ideology and social relations impact on business risk.
An important factor to note is the fact that financial traders, economist, politicians and academics may think differently about risk than a manager in the commercial world of global trade in goods and services. There is a need to understand risk in a more holistic framework rather than in compartments such as operational risk, market risk and credit risk.
It must be accepted that risk taking is what all of business is about. Business is about succeeding more then failing. One has to dare to succeed and information about markets and finance need to be understood in terms of probabilities of success. How we predict probabilities under uncertain economic conditions is the challenge.
We therefore need to construct a new global risk architecture within which prevailing models can better operate to help us predict the best course of action for the company and the probability of success. Factors such as increasing speed of flow of information, increasing access to information and the increasing interconnectivity of regions that transform the world into one giant market place need to be digested and taken into account in making business decisions.
We may need to move from an “industrial age” to an “information age” risk management approach of evaluating “internal organizational risk” within the context of “worldwide industry risk” to fully appreciate the impact of global financial realities on markets.
