Learning from Mistakes

The Economist has a nice piece about how European authorities did it right this time with volcano ash.  My previous two posts were about how last year’s closures were done without proper testing and my second post was about an article that seemed to justify those closures because of a detailed study of volcano ash.  I was afraid that it would lead to European authorities taking an even more conservative approach because of this study, overreacting without proper testing.  As I mentioned in the previous posts — I’m not arguing that the airspace shouldn’t be closed.  I’m arguing that it shouldn’t be closed without testing the actual ash – every time.  This new Economist article supports that view and states “The actual eruption of Grimsvotn a little over a month after the April 12 exercise shows that airlines, air traffic controllers, and governments appear to have learned the lessons of 2010’s Eyjafjallajokull-driven chaos.”

Now THIS is risk management.  Appropriate reactions by authorities to this new eruption is much more data-driven than the previous eruption.  An evidence-based approach to risk (heck, to everything) is a much better approach.  Arguably, when the last eruption started there was little evidence to go on.  In my view, that means it became imperative to collect the information as soon as possible.  This time around, it seems things are being done in a proactive way.  If it turns out that the ash really poses a risk, I’ll be the first one to support massive airport closures.  But massive airport closures without simultaneous verification should be criticized loudly.  I for one am glad they’re doing it right this time.


Optimism Risk?

Time Magazine has a solid article about the optimistic nature of the human mind.  Instead of summarizing its points, I suggest you read it before continuing this post.  While some may complain that I should provide a short version of the pieces I refer to, I think it’s better to take the 10 minutes it requires to absorb the author’s intended interpretation.  Besides, many of my previous posts already summarize it.  How’s that for justification.

Our optimism has obvious implications for how we think about risk and the last paragraph really sums up the situation nicely.  We’re all inclined to overestimate our chances of success and we downplay the negative consequences.  This approach has many benefits to the survival of our ancestors (uh, and for our decedents!) but it can cost us individually because we suffer the consequences when things don’t go our way.  Risk Management is about much more than preventing loss — it’s about keeping us in the game to take advantage of future opportunities.  The author’s last paragraph is key — knowledge about the downside of optimism is a very good way of preventing those losses.

As a very optimistic person, and a risk taker, I’m fascinated by the simultaneity of the benefits of believing we will prevail with the need for limiting danger that directly contradicts that optimism.  Since our brains appear to be hardwired to discredit (and sometimes not even notice) the downside, it’s that much more important for us to learn about how we naturally tend to view the world.  I for one do not plan on trying to be less optimistic.  Rather, I want to better understand the chances of different losses and what might lead to them.  That, it seems to me, gives me a solid chance of having the best of both worlds.

Radio by Phone

** Update to post on 5/13/11: You can listen to this episode by downloading the .mp3 file.

This post is to promote a terrific radio show I’m a regular guest on – the N@ked Short Club.  That’s right, the N@ked Short Club, which can be heard on the Internet.  Dr. Stu hosts this show Monday evenings in London on Resonance 104.4 FM, and whenever I’ve been there for the past few years Dr. Stu has been kind enough to invite me onto his show to talk about risk, hedge funds and other potentially interesting topics.  It seems that I haven’t been to London in a while (I think my last trip was in 2010 in fact), so Dr. Stu has asked that I participate by phone.  The risks of being live on the radio are one thing.  But the risks associated with not even being able to see the other guests and interact with them is something altogether different.  You see, one of the important communication tools we use while on the show is silent arm waving.  We regularly make gestures (that we think are quite clear) to one another while “live” in hopes of communicating without bothering the listeners.  It’s actually a lot like charades, but instead of a game it’s quite important to convey your meaning.  How am I supposed to do that from America over the phone?

So – if you’d like to hear me try to fit in with the other guests, please point your browsers to http://www.resonancefm.com at 9.00pm London time Monday May 9th.  That’s 4pm NY time.  Formal invitation to follow:


Formal Invitation:

You are cordially invited to listen to the Monday, May 9th edition of the N@ked Short Club: 9-10pm/21.00-22.00 hrs., London time, on Resonance FM [104.4FM within London/ online worldwide via http://www.resonancefm.com]: 1 hour of loose talk about hedge funds and the state of the world, plus sublime poetry and heady music…No promotional agenda, no commercial intent…just lederhosen and light relief in these interesting times.

Host, Dr. Stu and a team of Low Latency Therapists will help callers to the Emergency Hedge Fund Helpline (1-800-DISTRESSED) to realign with their Inner Investors’ Interests, with expert guests: by astral projection from the US, Damian Handzy- CEO, Investor Analytics; plus Richard Edwards- CEO, HED Capital; Matthew Sargaison- Chief Risk Officer, Man AHL; Gus Black- Partner, Dechert; Alessandro Di Soccio- Managing Partner, Titian Global; Margie Lindsay- Editor, Hedge Funds Review; Veteran hedge fund allocator, Hal McMath; & the Unique genius of featured artist/singer/poet/artiste, Anne Pigalle [www.annepigalle.com] and the Galleon-smooth Anna Delaney. Feedback to doctorstu@resonancefm.com

Resonance FM is not-for-profit (UK registered charity no. 290236): supported entirely by grants and donations [the Guardian calls it “the best radio station in London”; the Village Voice, “the best radio station in the world”] If you enjoy the N@ked Short Club, you can support the station’s continued growth with a secure donation via http://www.resonancefm.com