The thriller seems to be the story genre of our times - IMO, Risk Management seems to be the thrilling innovation type of our time. Financial risk management pushed it into our awareness. But it's indispensable for complex systems, in industries that process dangerous materials or need dangerous (automatic) processes…chemical reactors, oil platforms, power plants, heavy industry factories as prototypes…
Some call risk management the "art of security"…but, IMO, it should be quantitative and following a clear workflow.
Why risk analytics is thrilling
Everyone talks about risk, but only a few give serious thought to what it is. It's two-sided - with opportunities and danger - consequently, risk can be optimized.
Any business that transforms imagination, knowledge, products or services into margins, risks. On the business level it's Market Risk, the risk of losses in positions arising from market behavior (external factors). Market and credit risk are the major risk factors of financial industries, but I'll concentrate on operational risk (internal factors) here.
We all want to run our processes going to border speed, heat, reactivity…but, strictly avoiding hazardous actions.
We need in depths predictive modeling to forecast failures and consequences…hazards like explosion, fire, gas dispersion, dispersion of melt…uncontrollable reactions…
Hazards may harm individuals….kill a business...harm a society as a whole…
You need to identify the riskiness of your actors and actions, knowing that risk may become horrible in their interplay. You rely on models, but you also need to deal with uncertainty, even the unexpected…you run simulations to determine the possible outcomes…finally you make a decision.
If the iron melts through the walls of a blast furnace, everybody better runs…risk managers should have uncompromisingly requested a predictive 3D model of the process with respect to the erosion of the refractory lining…and constantly re-calibrated it's parameters to the actual process behavior.
Bad actors or actions…investigations…prevention…control
IMO, we are attracted by thrillers because we feel the world becomes increasingly chaotic and the connectedness is not only for the good…it helps the villains to organize. A Thriller share s aliments of Action, Horror and Crime genres.
And this is what the Matter Type Risk Management does. It expects a "crime" (a misbehave of actors in the process, technical or human that's actions lead to a dangerous process behavior).
The innovation plays a powerful investigator, detecting the "crime" early and analyses under which conditions it may become horrible…the investor uses advanced feature recognition, modeling, simulation, stochastic´c calculus…techniques…the value of the whole effort is not only the avoidance of the (risky horror of the) "crime" but the corrective control of the process…
Like in many thrillers the investigator (hero) does not only fight villains and bad actions, he works against the clock. This is an important convention of a risk management system (Main Street or Wall Street). It must work in or beat real time.
Risk management has clear but ambitious goals and a clear mission. They can create high values, but their functional and operational complexity is driven be the complexity of the processes, flows…Thrilling.