The failure of risk management: why it's broken and how to fix it

387 Pages·2020·3.038 MB·English

by  Hubbard, Douglas W

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The Failure of Risk
Management
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The Failure of Risk
Management
Why It’s Broken and
How to Fix It
Second Edition
Douglas W. Hubbard
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Thissecondeditionfirstpublished2020
©2020byDouglasW.Hubbard.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
EditionHistory
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LibraryofCongressCataloging-in-PublicationData
Names:Hubbard,DouglasW.,1962–author.
Title:Thefailureofriskmanagement:whyit’sbrokenandhowtofixit/
DouglasW.Hubbard.
Description:Secondedition.|Hoboken,NewJersey:Wiley,2020.|
Includesindex.
Identifiers:LCCN2019051494(print)|LCCN2019051495(ebook)|ISBN
9781119522034(hardback)|ISBN9781119522027(adobepdf)|ISBN
9781119522041(epub)
Subjects:LCSH:Riskmanagement.
Classification:LCCHD61.H762020(print)|LCCHD61(ebook)|DDC
658.15/5—dc23
LCrecordavailableathttps://lccn.loc.gov/2019051494
LCebookrecordavailableathttps://lccn.loc.gov/2019051495
CoverDesign:Wiley
CoverImage:©RomoloTavani/iStock.com
PrintedintheUnitedStatesofAmerica
10987654321
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Idedicatethisbooktomyentiresupportstaff:mywife,
Janet,andourchildren,Evan,Madeleine,andSteven,and
totheArmedForcesoftheUnitedStatesofAmerica.
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Contents
AbouttheAuthor xi
Preface xiii
Acknowledgments xvii
part one ANINTRODUCTIONTOTHECRISIS 1
Chapter1 HealthySkepticismforRiskManagement 3
A“CommonModeFailure” 5
Key Definitions: Risk Management and Some Related
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WhatFailureMeans 14
ScopeandObjectivesofThisBook 17
Chapter2 ASummaryoftheCurrentStateofRisk
Management 21
AShortandEntirely-Too-SuperficialHistoryofRisk 21
CurrentStateofRiskManagementintheOrganization 25
CurrentRisksandHowTheyAreAssessed 26
Chapter3 HowDoWeKnowWhatWorks? 35
Anecdote:TheRiskofOutsourcingDrugManufacturing 36
WhyIt’sHardtoKnowWhatWorks 40
AnAssessmentofSelf-Assessments 44
PotentialObjectiveEvaluationsofRiskManagement 48
WhatWeMayFind 57
Chapter4 GettingStarted:ASimpleStrawManQuantitative
Model 61
ASimpleOne-for-OneSubstitution 63
TheExpertastheInstrument 64
AQuickOverviewof“UncertaintyMath” 67
EstablishingRiskTolerance 72
SupportingtheDecision:AReturnonMitigation 73
MakingtheStrawManBetter 75
vii
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viii contents
part two WHYIT’SBROKEN 79
Chapter5 The“FourHorsemen”ofRiskManagement:
Some(Mostly)SincereAttemptstoPreventan
Apocalypse 81
Actuaries 83
War Quants: How World War II Changed Risk Analysis
Forever 86
Economists 90
ManagementConsulting:HowaPowerTieandaGood
PitchChangedRiskManagement 96
ComparingtheHorsemen 103
MajorRiskManagementProblemstoBeAddressed 105
Chapter6 AnIvoryTowerofBabel:FixingtheConfusion
aboutRisk 109
TheFrankKnightDefinition 111
Knight’sInfluenceinFinanceandProjectManagement 114
AConstructionEngineeringDefinition 118
RiskasExpectedLoss 119
DefiningRiskTolerance 121
(cid:2) DefiningProbability 128 (cid:2)
EnrichingtheLexicon 131
Chapter7 TheLimitsofExpertKnowledge:WhyWeDon’t
KnowWhatWeThinkWeKnowaboutUncertainty 135
The Right Stuff: How a Group of Psychologists Might
SaveRiskAnalysis 137
MentalMath:WhyWeShouldn’tTrusttheNumbersin
OurHeads 139
“Catastrophic”Overconfidence 142
TheMindof“Aces”:PossibleCausesandConsequences
ofOverconfidence 150
Inconsistencies and Artifacts: What Shouldn’t Matter
Does 155
AnswerstoCalibrationTests 160
Chapter8 WorseThanUseless:TheMostPopularRisk
AssessmentMethodandWhyItDoesn’tWork 163
AFewExamplesofScoresandMatrices 164
Does That Come in “Medium”?: Why Ambiguity Does
NotOffsetUncertainty 170
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