RISK AND REALITY: Part 2: Updating our prediction, One Year Later --After The Fall Of Lehman Brothers

Risk and Reality with Dr. Franco Oboni

foboni@riskope.com
http://www.riskope.com/
Riskope Risk and Crisis Management Blog: http://foboni.wordpress.com/ 
http://www.slideshares.net/foboni
http://www.youtube.com/foboni

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Prologue from Part 1:

In Part 1 of this series, we spoke about our having forecasted the effect on the financial services and capital markets sectors (i.e., the probability of a market collapse and the magnitude of loss caused by the meltdown of a major financial institution [in this case, Lehman Brothers, which went down in flames on the 14th - 15th of September 2008]), and we described the resistance on the part of so many businesspeople and professionals to take our prediction and the forecast model upon which it was based seriously. We discussed the reasons for this hesitancy  in terms of behavioral psychology; many individuals simply assumed that the meltdown was a one-time catastrophe, or that no multivariate predictive model could possibly be sufficiently encompassing and sophisticated enough to yield any outcomes worthy of serious attention and taking preventive or remedial measures.

One common reason for resistance on the part of so many was because of a negative prior experience with poorly-design models, or forecasts which were rigged (i.e., biased) to yield a certain desired result in support of someone's private agenda. A forecasting model which is inherently designed to generate a preconceived outcome is not a valid forecasting tool -- it is merely an instrument of propaganda. These tainted models, studies and surveys have made it difficult for any legitimate, objective risk analyst to get proper attention, often with tragic results. 

To Today's Discussion - The Results of the Forecast:  

The prediction, as we had published it over one year ago, is condensed and outlined  as follows:


1) Duration Forecast:

80% chance the crisis will be shorter than 3 years (ending by Fall, 2011).
30% chance the crisis will be shorter than 1.5 years (ending by Spring, 2010),
10% chance the crisis will be longer than 6 years (ending after Fall, 2014)

NB: From the data above it can be inferred that the probability of the crisis lasting between 1.5years (Spring 2010) to 3 years (Fall 2011) is 80%-30%=50%

2) Magnitude Forecast:

20% chance the present situation will persist (The Blues; see the Measurements Section of the published forecast).
25% chance there will be a significant worsening (Getting to Generalized Poverty; see the Measurements Section of the published forecast).
55% chance we will reach a critical level of disservice (Severe Impoverishment and Catastrophic Disruption, see the Measurements Section of the published forecast).

Those were the possibilities (expressed as percentages) of each possible category of outcome, in terms of the length and severity of the recession.

--Franco Oboni




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RISK AND REALITY: Part 2: Updating our prediction, One Year Later --After The Fall Of Lehman Brothers

RISK AND REALITY: Part 4: Updating Our Prediction, One Year Later -- After The Fall Of Lehman Brothers

Risk and Reality with Dr. Franco Oboni

http://www.riskope.com/

Where do we stand now?

A review of the recent world media and cursory gathering of factual data on jobs losses lead us to say that we are at the beginning of GP state (see definition above).

The U.S. unemployment rate increased to 9.5% by June 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. It is now reportedly above 10%. Similar increases are happening in France and other European countries.

Several countries including the US are operating severe cuts in all non vital areas, health programs (let's see what will happen in the US), reduction of salaries (or benefits) of public officers. Protests, criminality increase, and some violence are rampant; as an example, the 2009 May Day protests, a series of international protests that have taken place across Europe, Asia and in the other parts of the world over the current global economic crisis turned violent in Germany, Turkey and Venezuela as riot police battled protesters in their respective countries.

[Series To Be Continued]

- This article was written by internationally-acclaimed risk evaluation expert Dr. Franco Oboni, and edited by Douglas Castle for The National Networker Newsletter.

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RISK AND REALITY: Part 4: Updating Our Prediction, One Year Later -- After The Fall Of Lehman Brothers

RISK AND REALITY: Risk Management Related Syndromes and Their Cure

Risk and Reality with Franco Oboni, Ph.D.

Hazards have to be treated transparently, which of course does not exclude confidentiality, in order to avoid various well known organizational risk-related money wasting syndromes which we will summarize in three points:

The “specialist syndrome”: this syndrome leads hazard specialists of a given hazard, for example IT, military, political, or financial experts to believe they understand how to evaluate risks. They do not! What they can do is characterize the hazard they specialize in, but they simply do not know how to quantify, prioritize risks. We will not cite again the sub-prime/banking disaster, but let’s put in in simple terms: a car mechanic is not necessarily a racing pilot, right?

The “denial syndrome”: This syndrome is exemplified by the classic “it will not happen to me: I am too large, too small, it can only happen to others etc.” Well, invincible banks went on their knees, small Mom & Pop businesses were forced to shut…entire industries collapse…it will happen to you whether you like it or not, so stop procrastinating or looking into your horoscope! Get real and prepare.

The “technology fix-it-all syndrome”: This syndrome leads to the classic excesses driven by “hardware/gear” vendors and other biased parties who want to erase aspects of the hazards, but miss the true nature of the risks. History is full of invincible castles (I am not referring to Douglas Castle here) who were seized in a day, starting from Troy on; unsinkable vessels, who sank miserably; invincible armies who starved or froze to death too far away from a logistic base (Russian campaign(s) etc.). Furthermore, examples abound of laws and decrees aimed at solving one situation, then backfiring on another; parking planes close together to avoid “local sabotage” in Pearl Harbor, only to offer an easy prey to the Imperial Air Force, etc.

Can we cure these syndromes?

Of course we can..and here we summarize how:

• In a well managed organization hazard specialists should define the hazards, their magnitude, and to a certain extent, with facilitation, the likelihood of a strike.
• Then a Risk Manager will determine the risk posed by these hazards, after helping to evaluate probabilities and potential consequences of the hazards hitting the system. Finally a risk estimation will be delivered in a clear and transparent way, compared to the organization’s explicit and quantitative tolerabity threshold. A that point it will be possible to know which mitigations have to be implemented, if any, and a road map will be defined.
• In a well managed organization a preliminary risk assessment (see the two points above) will allow to evaluate which risks are relevant and should be tackled. This will result from a comparison of the evaluated risks with the organization’s tolerability curve, an exercise that has to be developed quantitatively and transparently in order to avoid biases of various nature.
• In a well managed organization prestige, arrogance and self-praise will be kept at bay by unbiased, transparent evaluations.
• A good Risk and Crisis Management approach will ensure the balance of the mitigative measures.
• No good mitigation can be implemented unless a serious Risk Management approach weights the residual risks, and secondary effects.

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RISK AND REALITY: Risk Management Related Syndromes and Their Cure

RISK AND REALITY: Do You Still Think Crises Are Mere Consultants’ Creatures?

Risk and Reality with Franco Oboni, Ph.D.

Well, all along our professional life of Risk and Crisis Management consultants and coaches we have been confronted with clients that expressed themselves with statements like: “well, you know, this kind of stuff only happens to others”, generally followed by “we are too small, … too large, too smart, too powerful”, etc. (please refer to http://theglobalfuturist.blogspot.com/2009/10/16-phrases-to-illustrate-some-human.html for more details).
Relentlessly we have kept our stance: crises are foreseeable, crises can be as costly as a natural disaster or a major accident, the public IS THE JUDGE, and the sentences he delivers cannot be appealed etc.
Examples abound in our courses and our latest book, but the one that follows is exceptional for many aspects.

United Airlines Lost $180 Million due to YouTube Video

We learned about this crisis as everyone else, via the media reporting in the morning news about how social media can seriously damage a brand.

The Story

Take a musician (Mr Dave Carroll, from Canada) going to a concert, who sees the airline ground crews manhandling his instrument (a beloved guitar) to its death (broken neck, fatal wound indeed).
Imagine other passengers witnessing the massacre under the indifferent look of totally uninterested flight crew zombies.
Mix to this an interminable series of communications between the victim and a ice cold airline management who refuses to take any responsibility.
Bad enough? Well, yes, for the victim, for sure; but the airline had no clue how bad things were going to turn for them!

You see, our victim-musician had the interesting idea to make a country tune (titled “United Breaks Guitars” by Dave Carroll ) out of his sad story, and such a nice one, complete with an amusing video, that became an instant success on Youtube (appx 4million views as we speak).

The Results

United Airlines share price dropping by 10% (i.e. 180MUS$ loss), equivalent to over 50,000 replacement of the defunct guitar. I do not think any Court would have punished so harshly the airline, but this is the power of the public-JUDGE: exemplary punishements and NO APPEAL.

Conclusions

In the era of internet, social media and networks, there is no hiding, there is no mercy for the culprits. And in period of exacerbated sensitivity to poor corporate behavior, like amidst a recession, and in the aftermath of large scandals (Madoff, banks etc.), punishments are going to get tougher and tougher.

There used to be a saying that one happy customer would report to three other people, but an unhappy one would spell his story to seven. Well, welcome to the world where a bad story can be broadcasted or is echoed out to four million within days, and for free!

For more information, please visit Franco's BIO.

Editor's note: Franco also does fiction. The Omani Link ... an Interactive Story began on October 20, 2009.

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RISK AND REALITY: Do You Still Think Crises Are Mere Consultants’ Creatures?

RISK AND REALITY: New flu: Tora! Tora! Tora! may not be the best way.

Risk and Reality
with Franco Oboni, Ph.D.

Smoky souvenirs

The man in front of me was very elegant, had impeccable manners, if only he had been smoking less. His corner office in the Tokyo HQ of his corporation, was indeed slowly delivering to its occupants, including me, an unbreathable cocktail of fine dusts and nicotine-tar loaded particles that probably still stains my lungs today.

We had been discussing how my company (Riskope) could deliver to his organization emergency planning, crisis management in that difficult time, during the 2003 SARS outbreak. They had operations all over the world, including China.

The green tea, brought in by a very nice secretary, kneeling down in front of us in compliance with long to die traditions, was helping me to endure the chemical attack. I was at my third cup, and the man was telling me how each one of their expatriate managers and their families in continental China was critical for operations.

When I asked if they had crisis management/emergency planning in place the man replied swiftly: “No”, and sipped another little green tea, lighting another sigarette.

I immediately asked him, frankly mesmerized: “...But, what will you do, if the worse happens and your managers and/or their families fall sick there?”

The reply came down as a dagger: “...Then we will send in the second wave!”

What has changed between 2003 and today?

Well, as far as I can see, not much: there are still organizations who sit totally unprepared and will decide later what to do, when, may be, the bulk of their personnel will be home infected with the new flu.

That's not precisely the way a responsible corporation/manager prepares to a very likely hazard which may bring in serious risks!

An epidemic is a crisis: a crisis like another, and “survival techniques/rules” exist.

The first step is to systematically anticipate and respond to threats. Crisis-prepared companies suffer fewer disasters and recover more quickly than crisis-prone firms. They also stay in business longer and are more profitable.

To be one of those long term survivors recognize the barriers preventing foreseeing risk scenarios:

psychological biases, information silos, prestige and arrogance.

Develop formal risk assesments and crisis/emergency plans.

Then, if and when risks become reality, follow your pre-defined plans, contain the crisis by acting decisively and quickly.

As a reminder: the SARS Outbreak (2003)

SARS (Severe Acute Respiratory Syndrome) was a pneumonia like illness that claimed more than 50 victims across Asia. In February 2003, this disease spread to Hong Kong: of the 1,755 people who were infected, 299 died.

The disease raised questions about tech companies' operations in Hong Kong, similar to the issues raised by an earthquake that shook Taiwan in 1999. That quake severely disrupted manufacturing at the Hsinchu industrial park south of Taipei, and in the process created shortages of graphics chips, memory chips and other components necessary for building personal computers and laptops. Personal computer makers took a indirect but rather significant hit from that quake.

As Asian authorities scrambled to contain the outbreak of SARS, citizens in the region reportedly turned to the Internet and mobile communications to protest public health policy and spread word of traditional Asian remedies for the deadly virus (Maunder et al., 2003).

The SARS outbreak in Toronto, which began on Mar. 7, 2003, resulted in extraordinary public health and infection control measures.

In a 4-week period, 19 individuals developed SARS, including 11 health care workers. The hospital's response included establishing a leadership command team and a SARS isolation unit, implementing mental health support interventions for patients and staff, overcoming problems with logistics and communication, and overcoming resistance to directives. Patients with SARS reported fear, loneliness, boredom and anger, and they worried about the effects of quarantine and contagion on family members and friends. They experienced anxiety about fever and the effects of insomnia. Staff was adversely affected by fear of contagion and of infecting family, friends and colleagues. Caring for health care workers as patients and colleagues was emotionally difficult. Uncertainty and stigmatization were prominent themes for both staff and patients (Skowronski et al., 2005).


For more information, please visit Franco's BIO.

Editor's note: Franco also does fiction. The Omani Link ... an Interactive Story began on October 20, 2009.

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RISK AND REALITY: New flu: Tora! Tora! Tora! may not be the best way.