to thewind? Caution - University of Edinburgh Business School

special featurespecial featureMSc IN FINANCE AND RISKDEALING WITH THE UNEXPECTEDRisk management has never beenmore relevant, which makes theUniversity of Edinburgh BusinessSchool’s decision to launch a newMasters programme on the subjectparticularly welcome.The first MSc of its type inScotland begins in September thisyear, and is expected to attractan initial intake of 25 students.The full-time one-year coursewill look at the theory andapplication of risk managementmodels, including the use ofsophisticated risk management modelling software.The course will prepare students for a range of financerelatedprofessions, such as in risk analysis or professional riskmanagement, and will be of interest to those intending topursue careers in banks, insurance companies, assetmanagement, corporate finance, accounting or regulation.The course director is Dr Gavin Kretzschmar, a specialist inthe area of financial sector risk and applied corporatefinance research.He said that if Scotland’s reputation for financial serviceshas come under attack, it’s time that we recognised the longstandingexcellence of the country’s educational institutes.‘Whatever the case with the country’s financial services is,what has seen Scotland through hundreds of years has beenits education, so right now we see a huge opportunity forrisk education, in this area of finance,’ said Gavin. ‘Out ofthis mess comes a big opportunity for us to specialise infinance and risk.’It was the gathering storm of the economic crisis in the firsthalf of 2008 which prompted the Business School to startthinking about expanding its offering to concentrate on risk.And despite the economic downturn, there should beplenty of opportunities for graduates from the programme,as companies restructure to incorporate more relevantrisk positions.‘These financial institutions have tens of thousands ofpeople employed, but extremely few qualified individualsin the field of risk,’ said Gavin. ‘That’s precisely the gapthat we’re targeting – we’re going to supply qualifiedrisk professionals who can go out to the financialservices industry.’If this is a growth area for academia, though, theUniversity of Edinburgh Business School is at the head of thequeue in terms of making it an offering, with only Universityof California Berkeley, MIT and Imperial College Londonamong the top-level institutions offering similar programmes.‘The fact that there are not many places offering this kind ofprogramme is the upside,’ said Gavin. ‘The challenge is you dorequire a fairly quantitative mindset to actually do thesecourses – you’ve got to deal with probability, you’ve got todeal with statistics.’For a copy of the MSc in Finance and Risk brochure, visitwww.business-school.ed.ac.ukDid youknow?For a range of riskmanagement jobs currentlyavailable, visitRisk Doctor & Partners, agreed thatwww.theirm.org communication and hierarchy are key areas.‘In the financial sector it was the business lineswhich ruled, and they had the ability to disregard oroverrule the advice of the risk function,’ he said. ‘So wewere waving the red flag saying “here’s the danger point”,and the business lines were saying, “okay, but we’re goingto do it anyway”.‘We’ve got to give some attention to communicatingmore appropriately, and that doesn’t mean we have to givelots and lots of risk geeks’ views. You have to speak tosenior management in their language but we have to keepour integrity of the message. Also the balance of powerwithin the organisation needs to be changed because riskmanagement needs to be given more say.’Peter Dalziel (Class of 1994) has recently takenredundancy from the financial sector to set up AicouteConsulting, which offers practical risk assessment andmanagement as a service.He believes best practice process can be easy tounderstand and essential if you are going to understandyour business and see it prosper, no matter what size it is.‘We get people to understand the risks in their business,or likely to emerge with new projects and ventures, andactually own them,’ he said. ‘It’s not for us to say to people,this is the right way. We help business owners to bringout the right options and find the appropriatecountermeasures to put in place.‘Sometimes it’s just about asking simple questions.When people are very close to their business, especiallysmall business owners, it can be quite hard for them totake a step back and say, hold on, there are different waysto do things.‘There is an operational benefit from understanding therisks and putting in place suitable measures in advance.These can be used to emphasise advantages overcompetitors, and there is the added benefit of being ableto sleep better at night.’Peter also warned of the risks of success. If things workout better than you think, he said, you need to be able todeal with higher volumes, otherwise your reputation cansuffer. Equally, remember that the unlikely can happen‘REMEMBER THATTHE UNLIKELY CANHAPPEN AND IF ITIS CATASTROPHICYOU NEED TO BEABLE TO LIVEWITH IT, NOMATTER HOWUNLIKELY IT IS’Peter DalzielLike a gamble on the roulette table,taking a business risk can be a goodopportunity, if managed appropriatelyand if it is catastrophic, you need to live with it, no matterhow unlikely it is.As Lord Turner, the head of the Financial ServicesAuthority, noted recently: ‘One in a thousand year eventsseem to be happening annually, and one in a hundred yearevents are occurring weekly at the moment. All our riskmodels need to be reviewed, updated and re-applied.’One of the key areas for companies to consider is instress-testing, to determine how robust their businessmodel is. At a recent seminar looking at risk andcorporate governance, Frank Blin, Senior Partner inScotland with accounting firm PricewaterhouseCoopers,said: ‘Every board must be looking at risk managementand risk assessment. They will need to “stress test”assumptions and look at how the business can deal withscenarios that a few months ago seemed unimaginablypessimistic or even completely unrealistic.’At the same meeting, Norman Murray, Chairman ofCairn Energy, said: ‘Business risks have changedsignificantly in the past six months and there’s no hopingthey will go away. The big risks facing the company needto be out on the table. Risk should be the number oneitem on the board’s agenda.’The fear for industry is that events of the past yearcould lead to a re-think in regulations when it comes torisk and corporate governance. The Financial ReportingCouncil has already announced a review to its CombinedCode on Corporate Governance, which sets out bestpractice corporate governance standards for UK-listedcompanies. One of the specific areas being looked at iswith the board’s relation to risk management.Ultimately, said Dr David Hillson, risk should be seenas creating positive opportunities, when it is managedappropriately. There was a view of the risk managementprofession as the ‘business prevention department’,because they were saying ‘you can’t do that’, he said.‘I think it’s important to view risk as an opportunity, arisk representing a positive chance. The future is uncertainbut risk in future possibilities is linked to innovation,creativity and competitive advantage.’Just as long as you’re trying to know as much as you canabout the unknown unknowns.The study of statistics and the use of sophisticated modellingsoftware can tell us a great deal about risk and how we canpredict what may happen in the future, based on a detailedunderstanding of what has already gone before.But how do you account for the truly unexpected?That’s the subject of Nassim Nicholas Taleb’s 2007 book,‘The Black Swan: the impact of the highly improbable’. Thetitle comes from the discovery of black swans in Australia inthe 17th century, which destroyed the prevailing assumptionheld up until then that all swans were white.Taleb wrote, prior to the collapse of the bankingsystem, that the financial services industry was vulnerableto unanticipated ‘black swan’ events, and companieswere exposed to losses beyond anything predicted bytheir risk managers.He has criticised widely used measures in the riskmanagement industry such as Value at Risk as giving traders afalse sense of confidence in their transactions.His study of the impact of unforeseen events is beingtaken on board by the risk management industry, saidCarolyn Williams, Development Manager at the Institute ofRisk Management.‘Stress testing scenario analysis is something that I thinkwe’re going to see a lot more of, because we’re seeing somany “black swans” flying around,’ she said.‘Taleb has a focused way of dealing with the unexpected,in his case by putting money into a fund every year to dealwith unanticipated situations. Translating that into corporateterms isn’t as easy as it sounds, but we need to develop newtools and techniques for dealing with that sort of uncertainty– and accepting that it can happen.’One of the key messages from The Black Swan is that tomanage risk and uncertainty, you have tolook beyond the statistics and the mathematics.Taleb’s example is of two characters, Brooklyn-bornwiseguy Fat Tony and the former engineer Dr John, who’snow an actuary for an insurance company, where he runscomputer programmes in risk management.The scenario is that you toss a coin 99 times and it comesup heads every single time. So what are the chances of itcoming up tails for the 100th toss?Dr John dismisses it as a trivial question, and logically saysthat there’s a 50 per cent chance of the coin coming up tailsthe next time.Fat Tony says the chances are one per cent. ‘You are eitherfull of crap or a puresucker to buy that 50per cent business,’ hesaid. ‘The coin gotta beloaded. It can’t be afair game.’Taleb also imaginesTony whispering in hisear: ‘I know these guyswith nerd examples fromthe bank days. They thinkway too slow. And they aretoo commoditised.’22 | aluminate | april 2009 www.alumninet.man.ed.ac.ukwww.alumninet.man.ed.ac.ukapril 2009 | aluminate | 23