The Failure of Risk Management, 2nd Edition

CHAPTER 12Improving the Model

The test of all knowledge is experiment. Experiment is the sole judge of scientific truth.

—RICHARD FEYNMAN, FEYNMAN LECTURES ON PHYSICS

When I conduct our webinar and seminar training, I like to divide the content into takeaway and aspirational. The former are methods the attendees should be able to immediately apply by the end of the training without further assistance. The basic one-for-one substitution described in chapters 4 and 11 is the takeaway method. This is the one of the simplest quantitative risk analysis methods possible. It involves just eliciting quantitatively explicit estimates of the likelihood and impact of events, the appetite for risk, and the effects of controls. Only the simplest empirical methods have been introduced and most estimates will rely on calibrated experts. This is the starting point from which we will improve incrementally as you see fit.

This chapter will provide a high-level introduction of just some of the aspirational issues of quantitative risk management. Depending on your needs and your comfort level with these techniques, you may want to introduce these ideas soon. The objective here is to teach you at least enough that you know these methods exist so you can aspire to add them and more in the future. The ideas we will introduce now are as follows:

• Additional empirical inputs
• More realistic detail in the model
• Further improvements to expert estimates
• More tools for Monte Carlo simulation
• Empirical tests ...