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

A practical guide to adopting an accurate risk analysis methodology The Failure of Risk Management provides effective solutionstosignificantfaults in current risk analysis methods. Conventional approaches to managing risk lack accurate quantitative analysis methods, yielding strategies that can actually make things worse. Many widely used methods have no systems to measure performance, resulting in inaccurate selection and ineffective application of risk management strategies. These fundamental flaws propagate unrealistic perceptions of risk in business, government, and the general public. This book provides expert examination of essential areas of risk management, including risk assessment and evaluation methods, risk mitigation strategies, common errors in quantitative models, and more. Guidance on topics such as probability modelling and empirical inputs emphasizes the efficacy of appropriate risk methodology in practical applications. Recognized as a leader in the field of risk management, author Douglas W. Hubbard combines science-based analysis with real-world examples to present a detailed investigation of risk management practices. This revised and updated second edition includes updated data sets and checklists, expanded coverage of innovative statistical methods, and new cases of current risk management issues such as data breaches and natural disasters. Identify deficiencies in your current risk management strategy and take appropriate corrective measures Adopt a calibrated approach to risk analysis using up-to-date statistical tools Employ accurate quantitative risk analysis and modelling methods Keep pace with new developments in the rapidly expanding risk analysis industry Risk analysis is a vital component of government policy, public safety, banking and finance, and many other public and private institutions. The Failure of Risk Management: Why It's Broken and How to Fix It is a valuable resource for business leaders, policy makers, managers, consultants, and practitioners across industries. An essential guide to the calibrated risk analysis approach The 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 methods--and 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. "Doug Hubbard, a recognized expert among experts in the field of risk management, covers the entire spectrum of risk management in this invaluable guide. There are specific value-added take aways in each chapter that are sure to enrich all readers including IT, business management, students, and academics alike" --Peter Julian, former chief-information officer of the New York Metro Transit Authority. President of Alliance Group consulting "In his trademark style, Doug asks the tough questions on risk management. A must-read not only for analysts, but also for the executive who is making critical business decisions." --Jim Franklin, VP Enterprise Performance Management and General Manager, Crystal Ball Global Business Unit, Oracle Corporation. "The Failure of Risk Management is about a serious problem in the business of risk analysis and how to fix it. Basic analysis methods are unused, or misapplied, in many major corporate and government decisions. This book shows how some of the most popular "risk analysis" methods are no better than astrology -they are not based on anything an actuary or statistician would recognize as sound, quantitative analysis. Businesses, governments, and the public have completely unrealistic perceptions of risk, currently. This book addresses proper risk methodology, to educate decision makers across industries. This new edition will include new examples citing recent events (e.g. hurricanes and data breaches), new statistical methods, and updated data"-- Provided by publisher Intro -- Table of Contents -- About the Author -- Preface -- Acknowledgments -- PART ONE: An Introduction to the Crisis -- CHAPTER 1: Healthy Skepticism for Risk Management -- A "COMMON MODE FAILURE"--KEY DEFINITIONS: RISK MANAGEMENT AND SOME RELATED TERMS -- WHAT FAILURE MEANS -- SCOPE AND OBJECTIVES OF THIS BOOK -- NOTES -- CHAPTER 2: A Summary of the Current State of Risk Management -- A SHORT AND ENTIRELY-TOO-SUPERFICIAL HISTORY OF RISK -- CURRENT STATE OF RISK MANAGEMENT IN THE ORGANIZATION -- CURRENT RISKS AND HOW THEY ARE ASSESSED -- NOTES -- CHAPTER 3: How Do We Know What Works? An essential guide to the calibrated risk analysis approach. The 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 methodsâ??and shows how all of these problems can be fixed. The solutions involve combinations of scientifically proven and frequently used methods from nuclear power CHAPTER 5: The "Four Horsemen" of Risk Management: Some (Mostly) Sincere Attempts to Prevent an Apocalypse -- ACTUARIES -- WAR QUANTS: HOW WORLD WAR II CHANGED RISK ANALYSIS FOREVER -- ECONOMISTS -- MANAGEMENT CONSULTING: HOW A POWER TIE AND A GOOD PITCH CHANGED RISK MANAGEMENT -- COMPARING THE HORSEMEN -- MAJOR RISK MANAGEMENT PROBLEMS TO BE ADDRESSED -- NOTES -- CHAPTER 6: An Ivory Tower of Babel: Fixing the Confusion about Risk -- THE FRANK KNIGHT DEFINITION -- KNIGHT'S INFLUENCE IN FINANCE AND PROJECT MANAGEMENT -- A CONSTRUCTION ENGINEERING DEFINITION -- RISK AS EXPECTED LOSS CHAPTER 8: Worse Than Useless: The Most Popular Risk Assessment Method and Why It Doesn't Work -- A FEW EXAMPLES OF SCORES AND MATRICES -- DOES THAT COME IN "MEDIUM"?: WHY AMBIGUITY DOES NOT OFFSET UNCERTAINTY -- UNINTENDED EFFECTS OF SCALES: WHAT YOU DON'T KNOW CAN HURT YOU -- DIFFERENT BUT SIMILAR-SOUNDING METHODS AND SIMILAR BUT DIFFERENT-SOUNDING METHODS -- NOTES -- CHAPTER 9: Bears, Swans and Other Obstacles to Improved Risk Management -- ALGORITHM AVERSION AND A KEY FALLACY -- ALGORITHMS VERSUS EXPERTS: GENERALIZING THE FINDINGS -- A NOTE ABOUT BLACK SWANS ANECDOTE: THE RISK OF OUTSOURCING DRUG MANUFACTURING -- WHY IT'S HARD TO KNOW WHAT WORKS -- AN ASSESSMENT OF SELF-ASSESSMENTS -- POTENTIAL OBJECTIVE EVALUATIONS OF RISK MANAGEMENT -- WHAT WE MAY FIND -- NOTES -- CHAPTER 4: Getting Started: A Simple Straw Man Quantitative Model -- A SIMPLE ONE-FOR-ONE SUBSTITUTION -- THE EXPERT AS THE INSTRUMENT -- A QUICK OVERVIEW OF "UNCERTAINTY MATH"--ESTABLISHING RISK TOLERANCE -- SUPPORTING THE DECISION: A RETURN ON MITIGATION -- MAKING THE STRAW MAN BETTER -- NOTE -- PART TWO: Why It's Broken DEFINING RISK TOLERANCE -- DEFINING PROBABILITY -- ENRICHING THE LEXICON -- NOTES -- CHAPTER 7: The Limits of Expert Knowledge: Why We Don't Know What We Think We Know about Uncertainty -- THE RIGHT STUFF: HOW A GROUP OF PSYCHOLOGISTS MIGHT SAVE RISK ANALYSIS -- MENTAL MATH: WHY WE SHOULDN'T TRUST THE NUMBERS IN OUR HEADS -- "CATASTROPHIC" OVERCONFIDENCE -- THE MIND OF "ACES": POSSIBLE CAUSES AND CONSEQUENCES OF OVERCONFIDENCE -- INCONSISTENCIES AND ARTIFACTS: WHAT SHOULDN'T MATTER DOES -- ANSWERS TO CALIBRATION TESTS -- NOTES