Chapter 2. What Problem(s) Are We Trying to Solve?
Actively going after further detection and analysis of problems, trends, and phenomena in your data and system is what drives the daily improvement that supports your strategy; it is a cycle where you identify your top issues, understand what causes them, and solve them so that other issues become your top concern. However, when you go after these issues, or when you find them, you need to deal with terminology;. How will you describe your findings? What is it that you’re trying to solve?
We are trying to optimize our risk, according to our risk appetite, measured as a balance between our losses and rejections. Let’s look at it step by step:
Optimizing risk. Risk is determined by the probability of an adverse event happening (fraud chargeback, merchant going out of business, a renter’s property being trashed) multiplied by the magnitude of damage we will incur (be it financial, reputational, or other).
According to our risk appetite. Determining whether we’re taking too much or too little risk is a decision owned by various officers of the company and/or external regulations—depending on the level and type of governance the company is subject to. The company’s appetite determines the amount of risk it’s willing to take; as any Head of RMP discovers, that appetite changes rapidly and is one of the major influences you must manage on a day-to-day basis. Regulation is a significant part of your risk appetite considerations. You will ...