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The failure of Risk Management
Transcript of The failure of Risk Management
Kin Chung, SHIU
Kam Pak, YIP
Background: The book was written during the financial crisis.
"Risk Management that simply reacts to yesterday's news is not risk management at all."
Author's idea: The solutions of managing risks are not based on actual measurements of risks.
with the researches by others
Much of the work done in Risk Management
has no value, even could make things worse.
The structure of the book
Part one: An introduction to the crisis
Part two: Discussing why it is broken
Part three: Introducing better methods for addressing previously discussed errors
Make your choice
Two kinds of friends, which one do you prefer?
He will compliment you, but often tells lies.
Never telling lies, but sometimes may hurt you.
The definition of risk management
What failure means
Why failure occurs
Common mode failure
Why the term is used too narrowly?
Longer definition: The planning, organization, coordination, control, and direction of resources toward defined objective(s)
Using what you have to get what you need
Eg. How to manage your time?
to make a
(what you need)
Longer definition: The identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events
Shorter definition: Being smart about taking chances
The probability or threat of quantifiable damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action.
Longer definition : the
of a loss, disaster, or other
Shorter definition: something
Anything goes wrong is undesirable.
Easier to understand
Risk Management = Risk + Management
Definition of “Risk Management”=
Definition of “Risk” + Definition of “Management”
Then we have:
Definition of “Risk Management”=
Something may go wrong, and thus we should use the resource to do something to eliminate the fault.
Fail an exam?
Being rejected by dream girl?
We are going to discuss the failure of sincere efforts to manage risk.
This book concentrated on
the organizations that they believed that they managed the risk effectively but actually they have no improvement at all
1. Failed to measure the methods of risk management in a whole or in part
They got no evidence to prove the effectiveness of the methods
The methods gives bad returns actually!!!!!!
The company used those risky risk management methods to manage risk.
2. Management methods of risks rely on human judgment
Human is not as accurate as computers.We can’t estimate risk perfectly.
The risk management methods rely on human judgment.This makes them unreliable.
We use them to manage risk, if we underestimate the risk, our plans may go wrong easily.
3. Methods that have been proved to work are not used in the real world
Some methods have been proven to be effective, although they may be comprehensive.
People do not adopt the effective methods is one of the causes of the failure.
Common mode failure is when
In my words:
When an event causes a coincidence of failure of many separate systems because of dependencies, it is called common mode failure.
An aircraft crashed, killing almost half of the onbroader. Although the government and media repeated that this is a "one-in-a-billion" event, the author didn't think so.
What happened at that time?
The tail-mounted engine failed, causing turbine blades to fly out. Since all three
redundant hydraulic systems are near the tail engine, the blades managed to cut the lines.
Another example beyond the book
The consequence of common mode failure
The Ariane 5 Launch Failure in 1996.
The cause was a software fault in equipment which was unchanged from Ariane 4, but which was unsuitable for the changed flight Ariane 5.
The ultimate common mode failure would be a failure of
risk management itself
. A weak risk management approach is effectively
in the organization.
is something 'macro'
is relatively 'micro'
Broaden sight to see risk, fasten reaction to modify strategy
risk is intangible
things can be assumed in theory, how about reality?
common mode failure exits
Anecdote in the book
-managers hold a discussion to manage risk
-numbering risks from different sides easily, even can be considered as by
Is it scientific?
We are going to produce a new drug, which is similar but not identical to one of our product.
Do you think it's risky?
According to our 'risk indicator', it might get a low risk of 2 out of 5.
-collecting data of movement of crust in the past
-with statistic collected, detecting the next earthquake
How do you know a risk
management method works?
-based on truth or experiment
-analysis and proving needed
So, risk management needs something like statistics and can be counted as science subject
It seems useful?
It pop up in your mind?
It favors you?
No real success but failure
of risk can hardly be found that you don't know what the risk really is, so we cannot guarantee a really
risk management, but can only make a
but in our view, risk management can be failed because of
, which we are
able to improve
but we didn't
The factory in the book
survives for a enough long time
though using a series of terrible risk management strategies
the smooth operation of a company is more likely insured by
, than its risk management, in some case
holding a wrong belief
not evaluating all possible significant risk and the probability of it
a fatal failure: being related to a total of 81 deaths