- 7/9/2013 5:47:02 PM
Broadway, you make a very important point! By the way, remind me to short the stock of banks completely ignoring or firing their CROs.
A CAO should be enterprise wide and have more influence/purse strings than the aforementioned ignored/fired CROs. Part of the problem with certains banks was that the money was too good, it was not risk-adjusted. For Bears Stearn, the more they leveraged (increased risk) the higher the bonuses for the c-suite. At Fannie Mae and Lehman Brothers, members of marketing, sales, and the c-suite were making so much money that the risk team and the veteran bankers of those organizations could not influence change until it was too late. An enterprise-wide CAO is better positioned to balance risk with marketing, sales, etc. Still, they have to have purse strings and teeth.
Your point makes it clear that updating corporations will take more than adding a token CAO. Corporations need to adapt; the CAO is a first step. The CAO should change the culture so that incentives make more sense and decisions are more informed.
- 7/9/2013 3:40:40 PM
@randeroid, you could argue that the chief risk officer at many firms -- particularly at financial services firms -- already has the job of increasing awareness of such things. During the lead up to the recent financial crisis, it was the CROs at big banks and investments houses who were telling executives and producers that they were taking statistically risky gambles on the CDOs and mortgage-backed securities and such. The same could be said of what happened at AIG. Risk officers internally sounded the alarm. They had the numbers to back them, and they were ignored or fired. Will a CAO be able to earn more respect, influence, etc. than these CROs?
- 7/8/2013 9:43:57 PM
Broadway, you are correct, people are always astonished by market crashes. Leading up to the next crash we will hear and see some of the same behavior. E.g., people will be saying that this is a 'new economy,' and the price-to-earnings ratios are different now. People will do anything to buy more stock, houses, tulips (The Dutch Tulip Bubble of 1637), or whatever. The general wisdom is that stock, housing, tulips, or whatever will go up another 10% (for five years in a row with 3% inflation and 2 to 5% growth). There comes a point where 'who is the bigger fool' kicks in.
Taleb realizes that on most days the market will rise and eventually there will be a crash. He is a smart guy and has a smart way to bet so that he loses a little on most days and more than compensates when there is a crash. We know there will be another crash. Again, a CAO will raise the corporate IQ.
- 7/8/2013 8:40:03 PM
I'll concede that Taleb writes as if he is the most brilliant mind ever and as if he is writing the 10 Commandments or something - straight from a deity to him and no one else. But there is something to be said about these certain time series happening with ever increasing frequency seemingly and always taking people (at least lay people and business people) by surprise.
- 7/8/2013 12:02:11 AM
I enjoyed reading Taleb's books. He has an interesting view and made some important points; it is just that we already know these points. We already know that you can not fit a model to certain time series, like the stock market. They taught us that in grad school and they explained why. Robert Lund's criticism of the Black Swan is that Taleb writes as if he is the first to discover that many populations are non-normal, that observations are not always independent, that time series can be unstable, that unusual events occur, etc. Also, Taleb overlooks the central limit theorem, which is like overlooking gravity. When Taleb attributes certain perspectives to statisticians, he is very far off (he might be doing this on purpose). Even more alarming is that he is not alone in possessing these bizarre ideas and they all should know better. This is why corporations need a high-level leader for business analytics—a CAO.
- 7/7/2013 8:34:14 PM
As for Taleb, he earned his money in the 87 crash being a wrong bettor. And he won because he knows there are points in time that models, analytics and optimism lose out. So obviously statisticians will not like his theories because basically he's saying they will be wrong -- big time -- every so often.
- 7/7/2013 12:13:11 PM
NRavindranaht10, I think you are right on several counts; corporations need a CAO to explain or 'sell' the value proposition; to organize the resources; and to grow the value proposition. As Deming said, 'The nonstatistician can not always recognize a statistical problem when he sees one.'
I think Robert Lund captured the weaknesses of Taleb's book, Black Swan: "reckless at times and subject to grandiose overstatements; the professional statistician will find the book ubiquitously naive." I read Black Swan and Fooled By Randomness (Taleb's books) and they were not without merit. However, as long as the Talebs of the world dominate the conversation about the quant's role in the corporation and our value proposition, we will be misunderstood. A CAO can make wanted cultural adjustments.
- 7/6/2013 11:46:38 PM
Broadway, I think I get your point that both cultures have captains of industry, who want to make these lone-ranger gut-instinct decisions rather than listen to some team's analysis. What I wish I had conveyed below is that the West places a greater emphasis on individualism and this might somehow accentuate the matter. What counts is that we learn from these lessons and make changes.
- 7/6/2013 10:19:39 PM
@Randeroid, I do not think the idea of a leader is unique to the West. The "East" has had it's fair share of leaders, dictators, kings, etc. But for sure, in US business culture, the leader is still king, so to speak. And that is not necessary a cause-effect with analytics .