Risk Mismanagement brought into the classroom

Joe Nocera, Risk Mismanagement, New York Times January 2, 2009


THERE AREN’T MANY widely told anecdotes about the current financial crisis, at least not yet, but there’s one that made the rounds in 2007, back when the big investment banks were first starting to write down billions of dollars in mortgage-backed derivatives and other so-called toxic securities. This was well before Bear Stearns collapsed, before Fannie Mae and Freddie Mac were taken over by the federal government, before Lehman fell and Merrill Lynch was sold and A.I.G. saved, before the $700 billion bailout bill was rushed into law. Before, that is, it became obvious that the risks taken by the largest banks and investment firms in the United States — and, indeed, in much of the Western world — were so excessive and foolhardy that they threatened to bring down the financial system itself. On the contrary: this was back when the major investment firms were still assuring investors that all was well, these little speed bumps notwithstanding — assurances based, in part, on their fantastically complex mathematical models for measuring the risk in their various portfolios.

I'm teaching a class in Database Design. Part of my scouting expedition into the worlds of academia. And tonight's class was on Reporting. Now, I think what everyone expects here is some tips on building reports using software packages (e.g. MS Access) and general design tips. I spent the session talking about why your doing reporting and focusing attention on the purpose of the report while doing the design.

And I've always had this fantasy in my head that I would try to bring in real world examples into teaching. For my midterm I put in an actual data collection form (which elicited a complaint about being vague and ambiguous. Complaints which are gladly voiced by the people who actually do the data collection using the form in question.)

So over the weekend, while thinking about what to do for this class (which was not looking very interesting) I thought about the financial crisis and all those little articles that I have been reading about the role of quants. And realizing that this was a reporting issue (i.e. the math was not the problem, it was in the communication, interpretation and use.)

The next question: How to do it. So I treated it as a case study. Operational environment. Problem description. Then led them through the thought process of the metric to be reported.

Next was the actual VaR metric. First explained the definition, then a discussion of where there was room for danger. Next, what the real definition was and a discussion of what people who VaR was reported to thought about it. Then a discussion of what happens when you measure something and use it as an evaluation metric (the metric was gamed.) And what happened when you did not pay attention (there was an asset which had characteristics that were hidden when viewed through the lens of VaR.)

Finally, the payoff. The wrong and right ways of using reports. Cribbed out of the New York Times article, which conveniently had both in one place.

While I won't say it was a free-wheeling discussion, there was some discussion. Not the risk taking opinionated you would get out of an MBA or policy course, but good enough. And it felt good to actually teach something.

Games I'm in

One of my many hobbies is playing table-top games. Of course, there is not that much time anymore, so these tend to be played only with imaginary friends (i.e. over the internet). And it does change its character over the internet (i.e. message boards and email). Because at that point it is more shared writing of fiction then a game. When I was deployed, a Marine in my unit enjoyed teasing me about this. After a point, when he commented that I seemed to feed this bit of entertainment, I replyed "if this is what you are ragging me on, I'm doing pretty good."

The premise of role-playing games is you play a character. And the character has a background which provides abilities, characteristics and motivation.

Like books and movies, there are many types of games, for different motivations for players. Some are more escapist, and the focus is on combating opponents in contests that follow set rules. These often involve lots of dice rolling. Dungeon & Dragons is the most well known of this type. Others are narrative, where the goal is to tell a good story and the characters are encouraged to take on weaknesses to advance a story line. FATE (Spirit of the Century) is like this. Others are focused on the characters, where the characters are written and played so they can be explored in depth. And in these later two, after the character is created, it almost disappears into the background, since the numbers do not matter as much as the description.

The idea is (unless one is escapist, or is playing a game that intentionally comedic) to see the world from another point of view, where you are faced with a different sets of abilities, skills, weaknesses, liabilities, strengths and knowledge. And you can make decisions that have consequences (in-game consequences that is).

I am in three games right now. In age:

Kanon: A non-commissioned officer in an army in a world that is mostly low-fantasy. Actually, because he is a very ordinary NCO, this is pre-industrial revolution. Other characters actually look more low-fantasy. There are actually two military branches in this scenario. One is focused on individual skill and its members have a upper class bearing to them. Kanon is part of the other one, whose focus is there professionalism. Kanon is sure that he is in the better branch. As he is also a racial minority (human) of a race that a large portion of which are in slavery, professional pride becomes a large part of how he engages the world. (http://www.kalyr.com, using Fudge (Wikipedia)

Adelson: a newly-minted university professor (biology) in 1920's United States. It turns out, finishing grad school and starting academia, brought him right back home. Which makes his mother very happy. The scenario (which he does not know anything about yet) is horror. What he knows is that there is an environmentalist vs. logging company fight not far from his university that he has been asked to study. (Call of Cthulhu, Wikipedia) )

Jason: a spaceship engineer/pilot who has just finished his enlistment in a space navy. And now needs work so he is signed up on a merchant ship. Actually, I don't know much about him yet. Yes, there is a character sheet and backstory, but the other players don't engage in much conversation, so there has not been much of a chance for him to have a personality yet. (Traveller (Wikipedia), using Fudge)

There is room for players in these games (well, not Cthulhu) if it is of interest.

In Memoriam: Keith Herber Post-Interview Chat Video

Yog RadioVision - In Memoriam: Keith Herber Post-Interview Chat Video

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In memoriuam at Yog-Sothoth.com

Keith Herber was an author of stories and game scenarios based on the setting of stories by H. P. Lovecraft, commonly referred to as the Cthulhu Mythos. He passed away suddenly last Friday. By all accounts, people remember him for his guidance in working through the collaborative process of writing as well as being an editor deeply concerned with the quality of the works that passed through him to print.

The craft of writing can be difficult. There is a need to write not just to tell a story, but to make a setting that is complete enough that the story has a place to live and flow. To create a game setting is even harder. You have to make the setting deep and rich enought that the reader can imagine a place in the world, and a group playing has room to roam. And you have to create the mood, such that those playing

I'm involved in a game based on one of Keith Herber's last works. We've just started, and as we settle into the personalities we've created, anticipating the path ahead, and wondering what Keith Herber has created for us. And remembering him.

PSO: Music by the sea

One of my hobbies is backpacking.  I enjoy the opportunities to be in the natural world, to accept it on its own terms (including storms), and to be able to listen.  And when you think of such things in music, the first piece that comes to mind is Beethoven Symphony No. 6, and the Fantasia rendering of green pastors, interupted by storms, and return to green pastures.  Except, the real, living world is not like that.  Even in its most peaceful and idyllic, everything is just much more, . . . , random.  And anyplace that is alive has sounds (whether or not you are listening properly is another question) and the representation of the natural world by sweeping melodies, evokes an emotion or a picture rather then represents its true nature.  Last night's Dharma at Big Sur by John Adams was different.

Dharma provided a different sort of view of the outdoors.  And listening to it brings you through a full day.  There is the beginning of the day, and you can almost hear the low murmurs of surf and nature entering your subconscious as you slowly wake up in the morning.  As the sun rises, more and more of the world awakes, with waking birds adding clarity above (but not replacing) the ambient sounds that continue. And finally, you wake up yourself, looking forward to the day and adventures ahead of you with sights and sounds both familiar and not (the gongs provide the different sort of sound that keeps things interesting.).

But my friends also know that water and I go together when I go outdoors.  And so Dharma has this too.  It also has the raw power of nature crashing.  But even here, its not just that you can hear the waves crashing against the rocks on the shore, or the thunder and lighting, but you hear the constant rain that is in the backdrop, and the wind's whistle bends as it goes by.

It is a different part of life.  I mentioned how John Adams Short Ride in a Fast Machine

seemed to reflect the greatness in even the doing of everyday tasks in a very man-made environment.  But this seemed almost organic and a living and growing thing.  And like a good backpacking trip, I almost expect it to be different the next time I hear it.

PSO: Wow, Fast fingers

I remember hearing about this concert a few weeks ago. I had been sent links to YouTube videos with Yuja Wang, and hints that she was a pianist with amazing technique, a virtuoso. But those are words I've heard before, and did not pay much attention.

For all the talk of technique and raw talent, I believe that there is more to being proficient then ability, it is the ability to apply that talent to a context interacting with others that provides value above and beyond the application of talent. I had a discussion about this in regard to a book I did not like all that much. It was a claim at a person could grow in skill to a level way beyond any of those around her. My claim has always been is that ability past a certain point requires a person be interacting with others who can complement her gifts and talents, and point the way towards greater heights.

Where I lose interest in virtuosi is when they seem to only shine alone. And the concerti where a soloist and the orchestra take turns playing are not as interesting as when the orchestra and soloist play off each other.

From the point of view of looking for virtuoso, Ms. Wang did not disappoint. I was amused during the intermission of one man who said to her "Wow." But, for all the accolades that Yuja Wang has received over skill, there was more she could show during the Prokofiev. From the opening, where the orchestra seemed like it was sneaking in to the piano's opening, to numerous transitions throughout, the changes in focus from piano to orchestra seemed smooth, with the level of intensity and energy matching at the point of transition, both the piano and orchestra parts fitting together. Supporting each other as in conversation, not merely dropping out in an exchange of soliloqueys. And sharing the stage does not make the soloist lessor, but made Ms. Wang's talent shine.

And this impresses me more than the ample demonstration of her skills, even more the arrangement of Flight of the Bumblebee encore that she played. That her and the orchestra playing together make each other look better. And people like that, not only do they look good. You are glad they do and hope to see them again.