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16 Risk management technology in financial services
one year’s repeated thirty times. Lack of polyvalent experience leads to blind alleys,
because there may be much better choices that one should have considered, but didn’t.
Theoretically many decisions come ‘naturally’. Practically this is a totally undoc-
umented statement. While a large experience helps in reaching difficult decisions,
analysis always provides a basis on which to confirm, reject, or be very cautious and
give the subject more thinking. Abstraction and modelling are helpful tools for this
process as Part 2 demonstrates.
Experimentation is important, both in strategic planning and in decision making,
because it often helps in pinpointing strengths and weaknesses, as well as in revealing
new paths. Moreover, experimentation enlarges the domain of knowledge used under
current and projected conditions.
Experimentation and innovation correlate. An example of innovation in action in
the banking industry is provided by Michael Milken of Drexel Burnham Lambert.
He invented the junk bond industry practically single handed, having found that the
probability of default of ‘fallen angels’ (sub-investment grade but formerly good-
standing firms) was only 1 per cent to 2 per cent higher than that of investment grade
companies.
The consequence has been that junk bonds became very popular because of their
higher interest rates. Their popularity, however, saw to it that the population from
which they were drawn changed, and probability of default zoomed. Eventually,
Milken was brought to justice (later, though, he became a very popular professor of
finance at UCLA); while Drexel, the king of junk bond business, had to pay a $650
million settlement of criminal charges, which shortly thereafter bankrupted the firm.
1.6 Business leadership
With any-to-any networks, on-line databases, interactive workstations and models,
the way of looking at banking and finance at large is as information in motion. The
shift from paper money, and from paper at large, to electronics is as important as the
change which took place some 2500 years ago, from barter to money. The problem
is that:
Our thinking,
Our attitudes,
Our skills, and
Our decisions
have not yet caught up with the new reality. Yet, this switch to the way of operating
in a technology intense environment has by now become a professional obligation.
As section 1.7 will explain, computers and communications are no more an emerging
technology; they are a mature infrastructure. By contrast, what is still a puzzle to a
surprising number of institutions is:
How to use technology to make profits, and
How to change internal attitudes so that profit and loss results are visible, and
judgment is based on results.

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