Failure imparts more lessons than triumph in money management. Success too often breeds hubris and excess confidence; disappointment invites analysis and reflection about what went wrong, why it went wrong and how to make sure the same mistakes aren’t repeated.
Progress in finance and economics, in other words, relies more on failure than success. The truism comes to mind after reading the “confessions” from a “risk manager at a large global bank” in the latest issue of The Economist.
Might progress one day come even before the trouble starts? Perhaps, although the problem is the nature of the beast. Risk is a slippery concept, in part because its preferred method of arrival is in the guise of sheep’s clothing. As the anonymous confessor in The Economist relates, risk has a nasty habit of appearing when common sense suggests otherwise.
“In January 2007 the world looked almost riskless,” the risk manager recalls. “At the beginning of that year I gathered my team for an off-site meeting to identify our top five risks for the coming 12 months. We were paid to think about the downsides but it was hard to see where the problems would come from. Four years of falling credit spreads, low interest rates, virtually no defaults in our loan portfolio and historically low volatility levels: it was the most benign risk environment we had seen in 20 years.”
It was also a time ripe with peril. The fact that few could see it, including the professionals paid to do just that, is a potent reminder that staying vigilant on the risk management front is an ongoing chore, particularly when it seems that risk is nowhere in sight.