Monday, May 31, 2010

Risk versus Uncertainty

Prof Frank H Knight (1921) proposed that "risk" is randomness with knowable probabilities, and "uncertainty" is randomness with unknowable probabilities. However, risk and uncertainty both share features with randomness. The illustration below explains the relationship of the concepts better than words...

Source: Knight, F H (2002/1921), Risk, Uncertainty and Profit, Washington, DC: BeardBooks.

Saturday, May 29, 2010

The Worries of Society

Please participate in this one question poll, thanks...

Comments welcome below...

Endeavors at Risk

What can we as risk modelers and decision analysts do to help ensure this kind of thing does not happen again...?

Suggestions welcome...

Thursday, May 27, 2010

How to Eliminate Society's “Big Problems”

Have you ever noticed that all the “big problems” that society faces are multi-billion dollar problems and not multi-million dollar problems? Apparently, multi-million dollar problems do not qualify as “big problems” in society. This makes sense because the difference between multi-billion dollar and multi-million dollar problems is significant.

This leads to a second observation. Have you ever noticed that all multi-billion dollar problems are associated with multi-billion dollar organizations? Apparently, multi-million dollar organizations do not create multi-billion dollar problems. Again, this makes sense because multi-million dollar organizations do not have the capacity to take multi-billion dollar risks.

Third, if all the “big problems” facing society are multi-billion dollar problems and all multi-billion dollar problems are associated with multi-billion dollar organizations, then might society eliminate all its “big problems” by getting rid of its multi-billion dollar organizations? Again, this seems to make sense because once all the multi-billion dollar organizations go away, only multi-million dollar organizations would remain, and multi-million dollar organizations do not have the capacity to take multi-billion dollar risks, thus eliminating the “big problems” at their source.

In summary, all “big problems” are evidently multi-billion dollar problems, and all multi-billion dollar problems are associated with multi-billion dollar organizations. Therefore, by eliminating all multi-billion dollar organizations, society could eliminate all its multi-billion dollar problems, resulting in no more “big problems.”

This stuff is easy once you put your mind to it…

Related Posts:

The "Big Problem"

Too Big...

Too Big to Fail, or Just Too Big?

Those Europeans...

Clearly, the Europeans have figured out the problem...

Related Posts:

Those Americans...

The Post-Modern Apocalypse

The Four Horsemen of the Apocalypse have apparently post-modernized their objectives from war, famine, pestilence, and death, into terrorism, austerity, pollution, and disease. The irony is that these apocalyptic risks have been effectively “sloganized” by our political establishment along the way. Clearly, elitism and populism lack the numbers to prevail against these post-modern threats; pluralism is society’s only hope for a safer future.

Wednesday, May 26, 2010

On Being a Tycoon

Someone recently asked me why after 17 years I am still in solo practice as an independent consultant and advisor. Well, here are some words from a book by Dr James Chan (2000) that I often refer to when I ask myself the same question...
Spare room tycoons are people who turn their personal passions into entrepreneurial businesses. Their main payoff comes in personal satisfaction, in autonomy, in deliverance from office politics, in the freedom to make their own mistakes instead of being forced to execute the misjudgments of others.
I love being a tycoon, albeit from a spare room...

Dr James Chan

Source: Chan, J (2000), Spare Room Tycoon: Succeeding Independently. London: Nicholas Brealey Publishing.

Tuesday, May 25, 2010

High-Level Systems Components and Integration Now the Priority

“High-level” and “low-level” are terms used to describe and classify systems. High-level systems are generally more abstract than low-level systems, which tend to focus on discrete data specificities within the system rather than on how the system produces information as a whole.

Typical Systems Stack for Bespoke Risk Analytics Production

The graphic above depicts a typical business systems stack that includes data warehousing, integration, and analytical components from multiple vendors. Note that the data warehousing and integration systems appear as low-level components, while the analytical systems appear as high-level components. A key objective of this system is to throughput data into the hands of analysts on a self-help basis.

Over the past decade, systems engineers have worked diligently to install the lower-level components of their systems stacks, including the hardware and software associated with data warehousing and rudimentary integration. However, progress on the upper-level components of these systems stacks has typically lagged. As a result, the realization of the business intelligence (BI) vision in firms has generally been limited to simple performance monitoring with only marginal successes in higher-order analytics production.

The emerging shift in priority from low-level to high-level systems components, and from performance monitoring to higher-order analytics production also means shifting certain decision prerogatives away from information technology (IT) departments toward subject matter experts and analysts. The fact is that BI is not only a production process that requires systems, but also a thinking process that requires both ad hoc and post hoc analysis and testing by subject matter experts. The future of BI requires restoration of the decision support function. Moreover, analysts rather than technologists must assume greater responsibility and leadership over the overall BI effort.

While the shifting emphasis from lower to higher-level systems components brings value-adding potential in the form of higher-level analytics production, this shift also introduces risks and responsibilities that firms must consider in order to better align IT investments with expanding BI requirements. High-level systems components and integration are now the priority.

Related Posts:

Performance Monitoring versus Analytics

Business Intelligence for the Masses Comes Alive

Business Intelligence Requires Thinkers

Monday, May 24, 2010

Using Inflation to Reduce Public Debt and Rout Entitlements

A relatively simple way to reduce public debt and rout government entitlements is through inflation. The phenomenon of using inflated dollars to pay for existing debts is a well understood benefit of inflation. Similarly, cost of living increases tend to lag inflation resulting in reduced entitlement obligations.

The aggregate increase in the Consumer Price Index (CPI) between 1973 and 1982 inclusive was approximately 85% (see How High Can Inflation Go…?). However, even a relatively modest 5-9% annual inflation rate over a ten-year period can reduce public debt and entitlements by at least half. Also interesting is the fact that the government does not need a public referendum to “print” money. Indeed, an extended period of inflation could be a slick way to solve the nation's deficit and public debt problems...

Related Posts:

How High Can Inflation Go...?

Repairing Sovereign Indebtedness: Get Ready

Using Inflation to Erode the US Public Debt

Implications of the Financial Crisis

Sunday, May 23, 2010

How Would New Yorkers React to Economic Austerity...?

My previous posts entitled Greece: What Economic Austerity Looks Like and How Would Californians React to Economic Austerity...? have generated pointed reactions from readers. However, one reader sent me an interesting note saying that the fiscal situation in New York is far worse than in California. Thus, I am now asking New Yorkers to respond to the same question I asked Californians: Assuming the US had to bailout the State of New York, how would New Yorkers react to a bailout plan that included the same economic austerities that the EU/IMF forced upon Greece...?

State Seal of New York

Keep in mind that the "Greek plan" would transpose into the following specific austerity measures for New York:
  • Reducing effective wages for state workers by 5-15%.
  • Banning pay increases for state workers for at least 3 years.
  • Raising the state sales tax by 2%.
  • Raising taxes on fuel, alcohol, and tobacco by 10%.
Reactions welcome...

Saturday, May 22, 2010

The High Accordances

Notre Dame de Paris
  1. "First, do no harm…"
  2. "Be the source…"
  3. "Be impeccable with your word…"
  4. "Don’t take anything personally…"
  5. "Don’t make assumptions…"
  6. "Always do your best…"

Hippocrates (1952). Of the Epidemics (F Adams, Trans). In R M Hutchins & M Adler (Eds), Great Books of the Western World (Vol 10, pp. 44-63). Chicago, IL: Encyclopædia Britannica.

Ruiz, M A (1997). The Four Agreements. San Rafael, CA: Amber-Allen.

Walsch, N D (1999). Abundance and Right Livelihood. Charlottesville, VA: Hampton Books.

How High Can Inflation Go...?

A student recently remarked to me that a 10 percent annual inflation rate in the US was “impossible.” Well, I invite anyone who shares this view to consider the US annual inflation rates between 1973 and 1982. Clearly, a 10 percent annual change in the US Consumer Price Index (CPI) is not only possible, it has happened! Moreover, the aggregate increase in the US CPI for the 10-year period 1973-1982 inclusive was approximately 85 percent (which I personally experienced following my graduation from high school in 1973). Oh yes, inflation rates of 10 percent annually and higher are absolutely possible…

Related Posts:

Using Inflation to Reduce Public Debt and Rout Entitlements

Repairing Sovereign Indebtedness: Get Ready

Using Inflation to Erode the US Public Debt

Implications of the Financial Crisis

Repairing Sovereign Indebtedness: Get Ready...

Sovereign indebtedness in democratic states can only really be resolved via three methods (or some combination thereof):
  1. The default route (cancellation of debts)
  2. The austerity route (drastic spending cuts and tax increases)
  3. The inflation route (“printing” money)
The Course Forward

Given that governments will not risk losing their sovereign borrowing power, the default option becomes unlikely. Moreover, given that voters will never consent to significant cuts in public programs or dramatic increases in taxes, the austerity route becomes equally unlikely. This leaves the inflation route (or “printing” money) as the most likely course forward for democratic states. Note that an important side-effect and key attraction of the inflation route for sovereign governments is to reduce the size and scale of public debt and entitlements through the inflation mechanism itself.

Best Advice

My best advice for workers is to get ready for inflation. Once the government embarks on the inflation route, unemployment will increase and remain high for the duration. Also, cost-of-living increases in pay and benefits will lag the inflation rate significantly. Even a 6-9% inflation rate over 7-10 years could mean at least a 40% reduction in real wages (and fixed pensions). Convert all existing debts (and especially mortgages) to fixed rate notes now, and eliminate all variable rate debt from your life, including credit cards. The greatest challenge for workers during periods of inflation is the risk of unexpected unemployment as firms and governments alike reduce real spending and investment under inflationary pressures. Again, get ready...

Related Posts:

How High Can Inflation Go...?

Using Inflation to Erode the US Public Debt

Implications of the Financial Crisis

Thursday, May 20, 2010

The “Orderly” Insolvency of States

German Chancellor Angela Merkel recently stated that the European Union needs a process for the "orderly" insolvency of its members. Does the US also need a process for the “orderly” insolvency (bankruptcy) of its states...?

Wednesday, May 19, 2010

Algorithms and the New Millennium

Dr David Berlinski (2000) makes the historical observation that two great ideas have most influenced the technological progress of the Western world:
The first is the calculus, the second the algorithm. The calculus and the rich body of mathematical analysis to which it gave rise made modern science possible; but it has been the algorithm that has made possible the modern world. (Berlinski, p. xv)
Dr Berlinski concludes that:
The great era of mathematical physics is now over. The three-hundred-year effort to represent the material world in mathematical terms has exhausted itself. The understanding that it was to provide is infinitely closer than it was when Isaac Newton wrote in the late seventeenth century, but it is still infinitely far away…. The algorithm has come to occupy a central place in our imagination. It is the second great scientific idea of the West. There is no third. (Berlinski, pp. xv-xvi)
Source: Berlinski, D (2000). The Advent of the Algorithm: The 300-Year Journey from an Idea to the Computer. San Diego, CA: Harcourt.

Related Posts:

Enter the Algorithm

Tuesday, May 18, 2010

The Intuitive Elegance of Stochastic Forecasting

I created the video below using Excel (Microsoft) plus ModelRisk (Vose) to demonstrate the intuitive elegance of stochastic forecasting. The blue line represents a notional historical time-series, and the red line represents the forecasted results. I removed the horizontal and vertical axis to avoid distraction from the forecasting process. The data from each forecast path is captured by Excel and ModelRisk for post hoc aggregation and statistical analysis:

Follow the link below to learn more about the software tools I use to generate stochastic forecasts in professional practice.

Software Tools

Related Posts:

Multiple Stochastic Forecasts Illustrated

Evidence of Indeterminism

Sunday, May 16, 2010

Multiple Stochastic Forecasts Illustrated

A client recently asked me to provide an illustration of what multiple stochastic forecasts look like. The graphic below is a two-dimensional example that speaks for itself...

Follow the link below to learn more about the software tools I use to generate stochastic forecasts in professional practice.

Software Tools

Related Posts:

Evidence of Indeterminism

Saturday, May 15, 2010

Probabilistic or Stochastic...?

1. Of, relating to, or based on probabilism.
2. Of, based on, or affected by probability, randomness, or chance: "The Big Bang universe is . . . exemplified in the probabilistic and indeterminate interactions of the smallest known physical properties" (Frederick Turner).

1. Of, relating to, or characterized by conjecture; conjectural.
2. Statistics
a. Involving or containing a random variable or variables: stochastic calculus.
b. Involving chance or probability: a stochastic stimulation.

Source: The Free Dictionary

Friday, May 14, 2010

The Future of Small Business in America

The exclusive footage below purportedly shows Fed chief Dr Ben Bernanke issuing private instructions to his board regarding how best to handle America's small business lending hassles:

Related Posts:

More Small Businesses Needed

Tuesday, May 11, 2010

The “Big Problem”

Google “big problem” and see what comes back. My search for a “big problem” returned approximately 5,900,000 results, implying that the “big problem” is a hot topic. The “big problem” for me is that I cannot figure out what a “big problem” is. Everything in the news is a “big problem,” including healthcare, energy, immigration, Wall Street, the Middle East, budgets, drugs, government, the environment, and even the future of golf. But, why is everything such a “big problem”? Are there not any “little” problems in the world today? How about “medium” problems, or is it simply the case that every problem gets upsized to “big” just because? I have no idea what the difference is between an ordinary problem and a “big problem,” but if you ask me, society needs to work on its ordinary problems for a while…

Monday, May 10, 2010

The Purpose of Risk Management

Here is a useful quote from Prof Emanuel Derman about the nature and purpose of risk management:
When I worked in firmwide risk I didn't clearly understand what our job was -- control risk, measure risk, whatever? Recently I heard a very good logical and philosophical talk by Steve Allen of NYU on the whole business. He's the author of Financial Risk Management: A Practitioner's Guide to Managing Market and Credit Risk. One of the things he said is that the purpose of risk management is neither to control nor measure risk, but rather to make risk transparent. It's such a clear and sensible idea. And, he said, and I think I'm quoting him correctly, that a risk manager shouldn't get fired if a firm loses a lot of money. They ought to get fired if a loss occurs owing to some risk that he didn't bring to the firm's attention.
Source: Derman, E (2007, March 13), The Purpose of Risk Management, Emanuel Derman’s Blog on Wilmott.

Sunday, May 09, 2010

Watch Your Thoughts...

"Watch your thoughts they become words. Watch your words they become actions. Watch your actions they become habits. Watch your habits they become character. Watch your character it becomes your destiny."

~ Patrick Overton

Saturday, May 08, 2010

Friday, May 07, 2010

Public versus Private Sector Wages and Benefits

Does anyone else find this chart disturbing...?

Source: Mandel, M (2010, May 3), Public Sector Pay Outpaces Private Pay, Mandel on Innovation and Growth.

Monday, May 03, 2010

How Would Californians React to Economic Austerity...?

My previous post entitled Greece: What Economic Austerity Looks Like, has inspired a new question: How would Californians react if the same economic austerities were imposed upon them by the US as part of a Federal bailout plan...?

State Flag of California

If the "Greek plan" was thrust upon California, the economic austerity measures would include:
  • Reducing effective wages for state workers by 5-15%.
  • Banning pay increases for state workers for at least 3 years.
  • Raising the state sales tax by 2%.
  • Raising taxes on fuel, alcohol, and tobacco by 10%.

Related Posts:

How Would New Yorkers React to Economic Austerity...?

Sunday, May 02, 2010

Greece: What Economic Austerity Looks Like

Recent events in Greece provide a glimpse of what economic austerity looks like. In exchange for up to 120 billion Euros ($160 billion) from the European Union (EU) and International Monetary Fund (IMF) over the next three years, Greece has committed to reducing its budget deficit to under the EU limit of 3% of GDP by 2014 (the US budget deficit as a percentage of GDP for 2009 was 9.1%). To fulfill this promise, Greece is planning dramatic tax increases and spending reductions, including:
  • Reducing effective annual wages for public sector workers (which in Greece includes teachers, doctors, nurses, train workers, air-traffic controllers, and many others) by 5-15% per employee
  • Banning increases in public sector salaries and pensions for at least three years
  • Increasing the Value-Added Tax (VAT) from 21% to 23%
  • Raising taxes on fuel, alcohol, and tobacco by 10%
I have to wonder whether Americans would accept similar austerities...

Rioting continues in Greece as workers protest austerity measures...


Barkin, N & Papadimas, L (2010, May 2), Greece Pledges More Budget Cuts, Gets More Time, Reuters.

Morley, N (2010, February 10), Public Service Workers in Greece on Nationwide Strike, VOANews.

US Federal Deficit as Percent of GDP (2010),

Related Posts:

How Would Californians React to Economic Austerity...?

How Would New Yorkers React to Economic Austerity...?

Saturday, May 01, 2010

Performance Monitoring versus Analytics

Find below a useful table (click image to enlarge) detailing the fundamental differences between dashboards for performance monitoring and analytical applications. Most business intelligence (BI) vendors blur their offerings between both categories of BI, often leaving buyers dissatisfied with the solution following installation. The ongoing tensions between information technology (IT) managers and business analysts exacerbate this confusion as IT managers tend to select dashboard monitoring solutions while business analysts often prefer stand-alone analytical applications. The differences between performance monitoring and analytics are instructive.

[click image to enlarge]

Source: Dashboard for Monitoring Performance vs Analytic Application (2010, April 14), On Target.