Risk management is a mindset you’d better cultivate in your everyday life
10+1 keep-home messages from Dr Cirillo YouTube course
In the midst of this tempest known as the COVID-19 pandemics, we have all acknowledged how many (tragic) damages can be provoked by politicians, bureaucrats and short-sighed intellectuals when they take or suggest wrong decisions while surrounded by such stormy waters. On a smaller scale, too, private citizens face everyday choices that could turn their lives, and that of their kins, into real nightmares: Should I invest thousands and thousands of euros in a car? Are my savings safe (aka, is my country at risk of being kicked out from the Eurozone?)? Should I bet all of my monthly salary on that horse named after my favourite wine?
In this phase of our lives, when uncertainty hit us like a truck coming from a direction we completely forgot to check, I strongly suggest you to seize the opportunity provided by the Quantitative Risk Management online course by Dr. Pasquale Cirillo (Associate Professor of Applied Probability at the University of Delft, collaborator of NN Taleb, and a sharp twitterer). No need to enroll to expensive Masterclasses: Dr Cirillo shares his course for free on his YouTube channel The Logic of Risk. You won’t be disappointed: he master the subject, and his calm, precise, dialogic style — with a number of slides limited to the essential — makes it even more evident. It’s hard not to take pleasure in listening to his rigorous explanations, especially when supported by historical notes and vivid analogies ranging from the Bhagavad Gita to football.
So, after giving a first listening to the first three videos the Introduction of the course, I took a sheet of paper and made a list of the main messages to take (or, rather, keep) home. I soon realized they were ten — which is always a nice number to end with. Thus, I present here the Ten Commandments about risk and risk management brought to us by Dr Cirillo, and a few personal comments and thoughts about them:
- “Risk” can be defined as the probability of a negative outcome, possibly to be prevented by our actions.
- “Risk” relates to be human, to be alive, to deal with the real world.
- Always be humble when dealing with risk.
- The assessment of a probability cannot be disentangled from the payoff. Dr Cirillo states he follows the subjectivist, and not the frequentist, approach to probability. In the words of the great Italian mathematician and statistician Bruno de Finetti: probability “does not exist” per se. Instead, probability is to be meant as the result of an assessment an observer makes onto some aspect of the world around him — a subjective, operative measure, the result of a bet. And such subjective bet is tightly intertwined with the subjectiveness, the perception, of what the eventual the loss might mean for who makes that bet. That’s the only why Michael Jordan’s notorious habit to bet thousands of dollars on his games of golf could be described as “a competition problem” and not as a striking example of ludopathy.
- You cannot manage risk without mastering probability theory and statistics. Galilei warned us that the world is written in the language mathematics, letters being circles and triangles. Well, probability theory must then be something like… the analysis of frequencies in code-breaking: if you know how to use it, it could make you win a war against the nazis.
- Statistics is the science (and the art) of extracting information from data, or, put another way said, of filtering noise. Here I would only add: studying statistics is hard, but it’s always a good idea (or, you can date a statistician).
- “Risk” is like an hypercube.
Being a long-time fan of Flatland, I liked a lot this analogy. The four dimensions of the “hypercube of risk”, as put by Dr Cirillo, are the (presumed) range of the possible outcomes, the scale(s) at which we look at the system, the depth of our knowledge of the system, and time. The passage of time, in particular, has the peculiar feature to allow us to gather more and more information, but at the cost of an increasing probability of ruin.
- Don’t be ashamed of taking advantage of heuristics.
Chess players know it: you cannot always calculate what’s the best next move. Often, it is convenient to rely on a different way of taking choices, that of heuristics, i.e. practical methods, simple rule of thumbs — very useful even if known to be imperfect. To pursue the chess analogy, examples of heuristics at the board are: “try to control the center”, or “develop your pieces”. Sometimes heuristics are actually the only way to start to gather information about the system under scrutiny.
- Mind the common fallacies and biases often embedded with our human way of thinking. On this, the literature is vast and many are the books treating this topic in an enjoyable fashion. A couple of examples are “Thinking, Fast and Slow” by Daniel Kahneman (Farrar, Straus and Girou, 2011) and “La démocratie des crédules” by Gérald Bronner (PUF, 2013).
- Decisions must be taken collectively, by all those involved by it. Experts can suggest, but choices are always to be taken democratically: Dr Cirillo intends this in the sense that the decision makers should always take decisions on a mandate-basis, and that the decision should directly be delivered to citizens only for specific issues with a long-lasting social impact. I would add by quoting Sir Roger Scruton and his “How to be a conservative” (Bloomsbury Continuum, 2014): “The good citizen is the one who knows when voting is the wrong way to decide a question, as well as when voting is the right way.”.
- Never forget the tail. :-)