The Failure of Risk Management: Why it's Broken and How to Fix it

The Failure of Risk Management: Why it's Broken and How to Fix it

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By (author) Douglas W. Hubbard

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  • Publisher: John Wiley & Sons Ltd
  • Format: Hardback | 304 pages
  • Dimensions: 157mm x 234mm x 28mm | 476g
  • Publication date: 15 May 2009
  • Publication City/Country: Chichester
  • ISBN 10: 0470387955
  • ISBN 13: 9780470387955
  • Sales rank: 86,498

Product description

An essential guide to the calibrated risk analysis approach The Failure of Risk Management takes a close look at misused and misapplied basic analysis methods and shows how some of the most popular "risk management" methods are no better than astrology! Using examples from the 2008 credit crisis, natural disasters, outsourcing to China, engineering disasters, and more, Hubbard reveals critical flaws in risk management methods-and shows how all of these problems can be fixed. The solutions involve combinations of scientifically proven and frequently used methods from nuclear power, exploratory oil, and other areas of business and government. Finally, Hubbard explains how new forms of collaboration across all industries and government can improve risk management in every field. Douglas W. Hubbard (Glen Ellyn, IL) is the inventor of Applied Information Economics (AIE) and the author of Wiley's How to Measure Anything: Finding the Value of Intangibles in Business (978-0-470-11012-6), the #1 bestseller in business math on Amazon. He has applied innovative risk assessment and risk management methods in government and corporations since 1994. "Doug Hubbard, a recognized expert among experts in the field of risk management, covers the entire spectrum of risk management in this invaluable guide. There are specific value-added take aways in each chapter that are sure to enrich all readers including IT, business management, students, and academics alike" -Peter Julian , former chief-information officer of the New York Metro Transit Authority. President of Alliance Group consulting "In his trademark style, Doug asks the tough questions on risk management. A must-read not only for analysts, but also for the executive who is making critical business decisions." -Jim Franklin , VP Enterprise Performance Management and General Manager, Crystal Ball Global Business Unit, Oracle Corporation.

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Author information

Douglas W. Hubbard is the inventor of Applied Information Economics (AIE). He is an internationally recognized expert in the field of measuring intangibles, risks, and value, especially in IT value, and is a popular speaker at numerous conferences. He has written articles for InformationWeek , CIO Enterprise , and DBMS magazine. His AIE method has been applied to dozens of large Fortune 500 IT investments, military logistics, venture capital, aerospace, and environmental issues. Doug is the author of How to Measure Anything: Finding the Value of Intangibles in Business (Wiley).

Review quote

"...shows how to identify and fix hidden problems in risk management. He uses real world examples to reveal serious problems in common quantitative and qualitiative approaches to risk analysis." ( Book News , August 2009)

Back cover copy

"The Failure of Risk Management" explains which risk analysis methods work, which don't, and how to tell the difference. "The Failure of Risk Management" discusses topics relevant to the management of any risk including: Financial Risks, Natural Disasters, Industrial Accidents, Product Safety, Technology Risks, Project Failures, Engineering Disasters, Pandemic Viruses, Computer Security, Fraud, Loss of Reputation, LitigationCompanion Web site www.howtofixriskmgt.comYOUR BIGGEST RISK IS THAT YOUR RISK MANAGEMENT METHODS PROBABLY DON'T WORK.THE FAILURE OF RISK MANAGEMENT"Doug Hubbard, a recognized expert among experts in the field of risk management, covers the entire spectrum of risk management in this invaluable guide. There are specific value-added take aways in each chapter that are sure to enrich all readers including IT, business management, students, and academic alike." --Peter Julian, former chief information officer of the New York Metro Transit Authority, President of The Alliance Group Consulting"In his, trademark style, Doug asks the tough questions on risk management. A must-read not only for analysts, but also for the executive who is making critical business decisions." --Jim Franklin, VP Enterprise Performance Management and General Manager, Crystal Ball Global Business Unit, Oracle Corporation"Doug Hubbard's book should be required reading for managers and practitioners responsible for mitigating risk. If corporations and government are to regain the public trust, effective and broad-based risk management must be as natural as breathing." --Ron Miller, FEMA CIO 2001-2002; former senior advisor, White House Homeland Security Transition Planning Office; Chairman, TeamRonMiller.com"A seminal and timely book. "The Failure of Risk Management" challenges conventional wisdom and provides priceless support to decision makers navigating their company in these turbulent times." --Dr. John F.A. Spangenberg, CEO, SeaQuation (an ING spin-off)"Doug Hubbard really knows his stuff. He is not just an author who has learned enough about a current popular topic to write a book, but instead is a talented consultant in this area, who has learned how to write, and write well. He displays a deep real-world understanding that ranges from mathematics to everyday human behavior, a trait that is all too rare in this age of specialization." --Prof. Sam Savage, Fellow, Judge Business School, Cambridge University; Consulting Professor, Stanford University School of Engineering

Flap copy

The 2008 credit crisis, terrorism, Katrina, computer hackers, and air travel disasters all have something in common-the methods used to assess and manage these risks are fundamentally flawed. If risks cannot be properly evaluated, risk management itself becomes the biggest risk. "The Failure of Risk Management" shows you how to identify and fix these hidden problems in risk management.Ineffective risk management methods, often touted as "best practices," are passed from company to company like a bad virus with a long incubation period: there are no early indicators of ill effects until it's too late and catastrophe strikes. Exploring why risk management fails--the failure to measure and validate methods as a whole or in part; the use of components known not to work; and not using components that are known to work--"The Failure of Risk Management" shows you how to measure the performance of risk management in a meaningful way, identify where risk management is broken, and fix it.Respected expert and bestselling author Douglas Hubbard-creator of the critically praised Applied Information Economics (AIE)--uses real-world examples to reveal the serious problems in our current approaches to risk analysis. Hubbard skillfully illustrates how to use a calibrated risk analyses approach, and the many benefits that go along with it, along with checklists and practice examples to get you started.One of the first resources to apply risk management across all industries, "The Failure of Risk Management" provides you with the tools you need to hit the ground running with radically better risk management solutions.Here, you'll discover: The diversity of approaches to assess and mitigate risksWhy many influential methods-both qualitative and quantitative don't workWhy we shouldn't always trust assessments based on "experience" aloneThe fallacies that stop you from adopting better risk management methodsHow those who develop models of risks justify (in error) excluding the biggest risksAdding empirical science to risk management

Table of contents

Preface. Acknowledgments. PART ONE AN INTRODUCTION TO THE CRISIS. CHAPTER 1 Healthy Skepticism for Risk Management. Common Mode Failure. What Counts as Risk Management. Anecdote: The Risk of Outsourcing Drug Manufacturing. What Failure Means. Scope and Objectives of This Book. CHAPTER 2 Risk Management: A Very Short Introduction to Where We've Been and Where (We Think) We Are. The Entire History of Risk Management (in 800 Words or Less). Methods of Assessing Risks. Risk Mitigation. The State of Risk Management According to Surveys. CHAPTER 3 How Do We Know What Works? An Assessment of Self-Assessments. Potential Objective Evaluations of Risk Management. What We May Find. PART TWO WHY IT'S BROKEN. CHAPTER 4 The "Four Horsemen" of Risk Management: Some (Mostly) Sincere Attempts to Prevent an Apocalypse. Actuaries. War Quants: How World War II Changed Risk Analysis Forever. Economists. Management Consulting: How a Power Tie and a Good Pitch Changed Risk Management. Comparing the Horsemen. Major Risk Management Problems to Be Addressed. CHAPTER 5 An Ivory Tower of Babel: Fixing the Confusion about Risk. The Frank Knight Definition. Risk as Volatility. A Construction Engineering Definition. Risk as Expected Loss. Risk as a Good Thing. Risk Analysis and Risk Management versus Decision Analysis. Enriching the Lexicon. CHAPTER 6 The Limits of Expert Knowledge: Why We Don't Know What We Think We Know about Uncertainty. The Right Stuff: How a Group of Psychologists Saved Risk Analysis. Mental Math: Why We Shouldn't Trust the Numbers in Our Heads. "Catastrophic" Overconfidence. The Mind of "Aces": Possible Causes and Consequences of Overconfidence. Inconsistencies and Artifacts: What Shouldn't Matter Does. Answers to Calibration Tests. CHAPTER 7 Worse Than Useless: The Most Popular Risk Assessment Method and Why It Doesn't Work. A Basic Course in Scoring Methods (Actually, It's the Advanced Course, Too-There's Not Much to Know). Does That Come in "Medium"?: Why Ambiguity Does Not Offset Uncertainty. Unintended Effects of Scales: What You Don't Know Can Hurt You. Clarification of Scores and Preferences: Different but Similar-Sounding Methods and Similar but Different-Sounding Methods. CHAPTER 8 Black Swans, Red Herrings, and Invisible Dragons: Overcoming Conceptual Obstacles to Improved Risk Management. Risk and Righteous Indignation: The Belief that Quantitative Risk Analysis Is Impossible. A Note about Black Swans. Frequentist versus Subjectivist. We're Special: The Belief that Risk Analysis Might Work, But Not Here. CHAPTER 9 Where Even the Quants Go Wrong: Common and Fundamental Errors in Quantitative Models. Introduction to Monte Carlo Concepts. Survey of Monte Carlo Users. The Risk Paradox. The Measurement Inversion. Where's the Science? The Lack of Empiricism in Risk Models. Financial Models and the Shape of Disaster: Why Normal Isn't so Normal. Following Your Inner Cow: The Problem with Correlations. "That's Too Uncertain": How Modelers Justify Excluding the Biggest Risks. Is Monte Carlo Too Complicated? PART THREE HOW TO FIX IT. CHAPTER 10 The Language of Uncertain Systems: The First Step Toward Improved Risk Management. Getting Your Probabilities Calibrated. The Model of Uncertainty: Decomposing Risk with Monte Carlos. Decomposing Probabilities: Thinking about Chance the Way You Think about a Budget. A Few Modeling Principles. Modeling the Mechanism. CHAPTER 11 The Outward-Looking Modeler: Adding Empirical Science to Risk. Why Your Model Won't Behave. Empirical Inputs. Introduction to Bayes: One Way to Get around that "Limited Data for Disasters" Problem. Self-Examinations for Modelers Who Care about Quality. CHAPTER 12 The Risk Community: Intra- and Extraorganizational Issues of Risk Management. Getting Organized. Managing the Global Probability Model. Incentives for a Calibrated Culture. Extraorganizational Issues: Solutions beyond Your Office Building. Miscellaneous Topics. Final Thoughts on Quantitative Models and Better Decisions. Appendix Calibration Tests and Answers. Index.