Risk Management is an Oxymoron

One of the faults of the investment industry is that reason and hubris too often trump common sense. Risk management is a good example of what I mean. Every investment firm trumpets its ability to manage risk as one of its greatest selling points to both its present clients and to future clients whom it tries to recruit through its ability to manage risk. Yet the term risk management is really an oxymoron – the words risk and management contradict each other and so, in the end, make no sense. Risk means the chance of a loss in an investment while management infers such things as structures, policies, use of predictive models, personal experience of managers to know or to sense what is happening in the markets that will control the exposure of any investor to a loss in their investments and thereby minimize the potential for that loss.

First of all, the market is not rational. Indeed, no one really knows how the modern market really works. Note all the different predictive tools in use by analysts to try and to figure out what the market will do and all of these tools, in the end, fail. So many factors outside the control of rational thought influence what the market does – wars, greed, fear, environmental catastrophes (natural ones like earthquakes or hurricanes and human created ones like BP’s oil spill in the Gulf of Mexico), terrorism, short term political and economic thinking that has long term harmful consequences (i.e., the ongoing fall out from those toxic sub prime mortgage investment vehicles) and the list goes on and on. The point here is that most of the consequences falling out from the above mentioned risks are outside of any person or group of persons in a financial institution to control or to manage. Indeed, what can best be said is that risks and their consequences are not managed (they can’t be!) they are reacted to after the fact in an effort to salvage what can be salvaged from the destructive consequences of that risk which is no longer a risk but now a catastrophe.

The investment industry couches risk management within an investment strategy known as a balanced investment strategy which is a method of portfolio allocation designed to provide both income and capital appreciation while avoiding excessive risk. Such a strategy has the ability to ‘win’, to make a profit, more often than it ‘loses’. However, the dynamic of the market is such that it only takes one catastrophe to wipe out the gains (and the original principle) of many wins. A better term for risk management, though admittedly not as macho and in-charge sounding, is reactive risk response – how quickly and effectively is the investment professional and investment firm able to minimize the negative consequences of any catastrophe.

What has all of this to do with ethics? It is about honesty to clients. Call a spade a spade and don’t dress up what is essentially unmanageable with terms that imply the unmanageable can be managed. Transparency is called for here. Investing is a crap shoot in which the dice are often loaded and the crap table moves or completely flips over unpredictably.

False Advertising

Today (June 15, 2010) I saw a full page advertisement in the Globe and Mail (Canada’s national newspaper as it calls itself) placed by Athabasca University which is an online university based in northern Alberta. The advertisement, in the Globe’s business section, had a lead off headline that shouted “Leaders” and then it listed the latest crop of its MBA graduates. The advertisement obviously was saying those lucky few who graduated with its coveted MBA were leaders. What bullshit! Someone with an MBA is no more of a leader than someone receiving a high school diploma. Indeed, some graduating high schoolers are more leaders than many holders of MBAs.

This blog is primarily about business and ethics. So what has Athabasca University and its advertisement to do with ethics? Plenty. First of all, not just Athabasca U puts such advertisements about its MBA graduates in the media. All of the major MBA programs in Canada do so. All of them equate holding an MBA with leadership and being a leader. This is, minimally, a lack of transparency on the part of these business training schools and, more often, an out and out lie. An MBA is just a piece of paper that says its holder has completed a number of courses in business. Period. It says nothing about the character of the holder of that diploma. It says nothing about the holder of that diploma having the abilities (vision, motivation, outwards focused, empathetic relational skills, etc) that are core to any leader. The graduates of MBA programs have surely read some articles, maybe even a book or two, on these abilities, chatted about them in class, done a case study or two on them; maybe if the MBA program is a co-op program the student has had the opportunity to observe a real leader in action. But having an MBA does not in any way mean you are a leader. It only means you have passed whatever courses the program (and paid the hefty fees that go with that program) has decided makes for a good theoretical business education. Leadership is theory and so can be studied. Being a leader however is not theoretical, it is the individual who has developed those leadership abilities through experience melded to a character that is focused on the well-being of the larger group (no self-serving, whats-in-it for me types need apply – oops, that covers the vast majority of business MBAs). To say, as Athabasca U has in its advertisement in the Globe, that its graduates are, ipso facto, leaders because they have received an MBA is logically a fallacy and a lie. What would be true is if the MBA factories would say their graduates have received a solid background in business theory and practices. And that’s all, folks.

Stop trying to con us. After all, almost all of the MBA factories emphasize how ethics is a key component of their training process. So practice what you preach.