Tag Archives | risk

CII: Richard Bookstaber – Dynamic Risk Models

Richard Bookstaber: Human Complexity and the Financial Markets

Richard Bookstaber discusses value at risk modeling — easily the most illuminating talk at #CIIFall2017. It was certainly statistics aimed at the layperson. However, in listening to him, I was glad I completed by PhD comprehensive in statistics 35 years ago.  I scribbled a few notes. Although I can’t guarantee accuracy, if I motivate a few fund managers to read his The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction I will be delighted.

Richard Bookstaber: Shifting From Static to Dynamic Interactions

Value at risk models are moving. Early theorists believed economics would only become a science if approached with mathematical rigor, removing human sentiments, and concentrating on the underlying static causes. After more than 100 years, we began to see that we couldn’t forecast the future by modeling the past. The world isn’t static. Under Dodd-Frank, we began stress tests. What it this happens? If I understand correctly, Richard Bookstaber wants to take modeling a step further – essentially stress testing with agent-based models. Not only does history not repeat itself, people are unpredictable agents. Modeling needs to factor in the dynamic interactions of agents, their models and how activity is ever-changing through feedback loops.

Richard Bookstaber: A Few Key Bullets

  • Agents. Drivers have various heuristics. We can typecast drivers into speeders, lane-changers, etc. to help model defensive driving in autonomous vehicles. 
  • The environment is never the same. Agents act, the environment changes. The cycle repeats.
  • We are not automatons as classical economics assumed. (That’s why I changed majors.)
  • Emergence – we interact with our environment and end up in a stampede. Fire marshals can model human herd behavior.
  • Radical uncertainty – we create and invent, changing our world. Filled with surprises
  • Computational irreducibility – Interactions create dynamic complexity. We can’t solve for life, we have to live it.
  • Non-ergodicity – We change with our experiences. The future will not look like the past.

The Four Horsemen of the Econopolypse – aspects of reality that traditional economics sweeps under the rug… emergence, non-ergodicity, radical uncertainty, and computational irreducibility.

  • Emergence occurs “when systemwide dynamics arise unexpectedly out of the activities of individuals in a way that is not simply an aggregation of that behavior.”
  • Non-ergodicity is a feature of financial markets throughout. That is, markets vary over time; they do not follow the same probabilities today as they did in the past and will in the future.
  • Uncertainty is radical when it cannot be expressed or anticipated, when we’re dealing with unknown unknowns.
  • Computational Irreducibility. Our economic behavior is so complex, our interactions so profound that “there is no mathematical shortcut for determining how they will evolve.”

Richard Bookstaber: More Concepts Discussed

Below are a few more concepts discussed by Richard Bookstaber but I don’t have the notes or time to further decipher. Egress – Liquidity, Flammability – Leverage, Crowding – Concentration, Asset shock or funding shock; Forced sales do to leverage; Price effects do to concentration; Further declines due to illiquidity; Cascades and Contagion; Key Data missing – leverage, concentration, illiquidity, collateral damage. Events have fat tails; they are not symmetric. Movement into tails is not smooth. Risk doesn’t resolve at a constant rate. We must move to an agent-based approach.

The end objectives are to manage risk, generate return, and dampen the crises. Develop scenarios, crowd-source the data and mirror the investment process. High frequency traders have kill switches. That accelerates crisis because trading stops and liquidity drops. Leverage is somewhat tamed but not liquidity. Passive index investing is part of the issue.

If I had my camera, I would have taken some shots of his interesting explanation of cascading impact. See Richard Bookstaber’s YouTube video below, especially starting about 30 minutes in. Read his blog.

My cynical take away is that few will adopt Richard Bookstaber’s methodology because we want simplicity. However, the world isn’t simple. Hopefully, a future CII meeting will feature Bookstaber leading a wise group of investors, feeding cascading scenarios into Watson or some other AI device.

Continue Reading · 0

Moneyball Corporate Governance

Moneyball Corporate Governance: making the best use of what limited capital is available – just like what the Oakland A’s had to do with their limited payroll.

David R. Koenig, Founding Principal, The Governance Fund & Author of Moneyball Corporate Governance

David R. Koenig, Founding Principal, The Governance Fund, Author of Governance Reimagined: Organizational Design, Risk, and Value Creation

In the mid-1980s, New York Mets manager Davey Johnson was among the first in professional baseball to realize the advantage that could be gained by using computers and statistics to help select the team members for any given game, the order in which he played them, and even which specific pinch-hitter to use in a given situation. Under his leadership, the New York Mets won the 1986 World Series, Major League Baseball’s championship series.

The more widely known Moneyball story, made famous by Michael Lewis’ book and a movie starring Brad Pitt, takes place nearly 15 years later. It tells a similar story – of using analytics and probability-based decision-making to successfully discover hidden value in both players and collections of players. In that story, the focus of the analytics is on maximizing player and team performance relative to the constraints of the Oakland Athletics’ very limited payroll. Continue Reading →

Continue Reading ·

Norges Bank: Responsible Investment

Norges Bank responsible-investment-2015Norges Bank published their second annual report on responsible investment of the Government Pension Fund Global. They clarified expectations towards companies in 2015 and are creating a model I hope many will follow

The report provides a comprehensive review of work by Norges Bank on responsible investment in the management of the fund. Key areas of this work include developing and promoting international standards and principles, expressing expectations towards companies, and being an active owner.

Norges Bank expects companies to address a broad set of long-term risks in their strategies, investment plans, risk management and reporting.  They updated expectations with regard to children’s rights, water management and climate change in 2015, and today they are also publishing their expectations for how companies manage human rights. Monitoring environmental, social and governance risks in the portfolio is an important part of Norges Bank Investment Management’s work on responsible investment. Continue Reading →

Continue Reading ·

Rethink Resource Extraction

Norway’s Resource Extraction

Plundered Nations? Successes and Failures in Natural Resource Extraction

Plundered Nations?: Successes and Failures in Natural Resource Extraction

The Government Pension Fund Global (Norges, the Norwegian sovereign wealth fund), is one of the world’s largest funds initially funded by resource extraction.  Learn about its history, objective and management in the video clip below. The fund is saving for the future generations in Norway; where is the American equivalent?

To achieve broad exposure to global economic growth, Norges invests widely in most markets, countries and currencies outside Norway. The largest geographic exposures are to Europe and North America, followed by developed markets in Asia and Oceania and emerging markets. At the end of 2014, the fund’s holdings related to 75 countries and 47 currencies. Continue Reading →

Continue Reading ·

CIO Perspectives: Capital at Risk

Risk and ReturnHere are more of my notes and photos from the Council of Institutional Investors Fall 2015 Conference in Boston. I added the subtitle to the name of this session, which mostly explored managing risk in low-return environment but touched on many additional topics. Feel free to post corrections, counterpoints and additional relevant material on topic, using the site’s comment feature. Find more posts from the conference on this site or Twitter by searching #CIIFall2015. Continue Reading →

Continue Reading ·

Call for Papers: Critical Issues for Boards & Institutional Investors

WeinbergCtrThe John L. Weinberg Center for Corporate Governance of the Alfred Lerner College of Business & Economics at the University of Delaware will host a Corporate Governance Symposium on March 15, 2016.  The focus of the Symposium will be “Critical Issues for Boards & Institutional Investors in 2016.”  The Symposium will feature up to four academic papers on corporate governance and a panel discussion featuring speakers from the Delaware judiciary, academic, business and legal communities.  The John L. Weinberg Corporate Governance Best Paper Award will be presented during the symposium luncheon.    Continue Reading →

Continue Reading ·

Gilead Sciences (GILD): Proxy Score 41

Gilead SciencesGilead Sciences $GILD is one of the stocks in my portfolio. They are a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need Their annual meeting is coming up on 5/6/2015. ProxyDemocracy.org had the votes of four funds when I checked and voted on 4/28/2015. I voted with management 47% of the time and assigned Gilead Sciences a proxy score of 47. Continue Reading →

Continue Reading ·

Anadarko Petroleum (APC): Report on Carbon Asset Risk

AnadarkoThe following PX14A6G filing on a shareholder proposal at Anadarko $APC by As You Sow might be of interest to readers. I’m too busy with my own proposals to make all the links work and to neaten up this post but you can find them in the original filing here.

I suspect we will see many more proposals like these in future. I think there are risks in carbon investments to both inhabitants of Earth and individual portfolios, so have sold just about everything in my portfolio in that sector, preferring alternative energy and biosciences. I like what As You Sow is doing and for a while I was trying to invest in “best-in-class” carbon companies… hoping to see more transition their investment to renewables. Unfortunately, what I found was mostly just greenwashing efforts. There is certainly much to be said for investors, like As You Sow, hanging in there and pushing from the inside. I applaud their efforts.  Continue Reading →

Continue Reading ·

OECD’s Draft Updated Principles Support Proxy Access

OECDThe OECD is inviting public comment on its draft updated Principles of Corporate Governance – last updated in 2004. These principles (first published in 1999) have long been among the most influential sources of corporate governance guidelines for regulators, stock exchanges, investors and companies world-wide, and continue to be referenced as a benchmark for good governance practices.

Continue Reading →

Continue Reading ·

Violating Indigenous Peoples’ Rights Increases Industry Risks

A new report finds that US extractive companies expose shareholders to risks by neglecting Indigenous Peoples’ rights

First Peoples Worldwide

Sustainable, Responsible, Impact InvestingFirst Peoples Worldwide released the Indigenous Rights Risk Report at the SRI Conference on Sustainable, Responsible, Impact Investing, a product of two years of consultations with investment analysts, industry professionals, and Indigenous Peoples. The report analyzes 52 U.S. oil, gas, and mining companies with projects operating on or near Indigenous territories around the globe, impacting some 150 Indigenous communities. These projects were assessed against five indicators (Country Risk, Reputation Risk, Community Risk, Legal Risk, and Risk Management) to determine their risk of Indigenous community opposition or violations of Indigenous Peoples’ rights. Continue Reading →

Continue Reading ·

GMI Incorporates Trucost Data into Analyst Platform

GMI and Trucost announced a strategic partnership to incorporate Trucost environmental performance data into the GMI Analyst research platform. The agreement strengthens GMI’s existing governance analysis and will enable GMI clients – leading institutional investors, banks, insurers, auditors, regulators and corporations – to incorporate a measure of environmental risk alongside traditional financial metrics. Continue Reading →

Continue Reading ·

Modeling Black Swans

GMI Ratings has long maintained that the increasing frequency of Black Swan events in capital markets will continue to challenge traditional approaches to risk modeling and portfolio management. For at least the past two decades, doubts have been mounting about the ability of classical economic theories and portfolio management philosophies to reliably describe, explain or predict anomalous trends and events in the stock market. Value-crushing scandals, such as those at Chesapeake Energy, Carnival, Wal-Mart, Halliburton, MF Global, News Corporation and BP have become all too familiar. Continue Reading →

Continue Reading ·

Emotional Intelligence

We need to do a better job of evaluating the emotional competency or our leaders. “A fine balance has to be maintained between technical and emotional competency of the individual and organization objectives and culture, wrote Sonia Jaspal back in 11/16/2011. Here is an excerpt from her argument, which deserves wider circulation.  Continue Reading →

Continue Reading ·

Don't Be the Next JinkoSolar – Ceres Offers Aqua Gauge For Risk Management

JinkoSolar Holding Co., Ltd. got sued on 10/11/2011. The plaintiff firm is Sianni & Straite LLP. According to a press release dated October 11, 2011, the Plaintiffs allege violations of the federal securities laws in connection with false statements released surrounding its IPO.

Based in the People’s Republic of China, the Company launched an IPO in the United States on May 13, 2010 issuing 5,835,000 ADSs to trade  on Continue Reading →

Continue Reading ·

McKenna's Insights into Berkshire Hathaway

Francine McKenna isn’t afraid to take on the big four auditing firms or the rich and powerful. Look for her column, Accounting Watchdog at Forbes.com. The following is an extended excerpt from a recent post, The Berkshire Hathaway Corporate Governance Performance. “Buffett judges the investments he makes ruthlessly, but allows his operating companies to run on autopilot.” That decentralized structure allows plausible deniability when anything goes wrong.

I encourage reading the entire article and getting familiar with McKenna’s work. It is good to see such an expert willing to speak truth to power. As a Berkshire Hathaway shareowner, her analysis certainly makes me nervous and it is hard to imagine shareowners taking on such an iconic figure through governance initiatives successfully.

…Before leading the Treadway Commission, before the savings and loan scandals of the 1980’s, before Enron and the rest of the scandals of the 90’s such as WorldCom, Tyco, Adelphia, HealthSouth, and many Continue Reading →

Continue Reading ·

Next ShareOwner Proposal Hot Topic: Climate Change Risk Assessments at Insurance Companies

Only 11 of 88 major insurers surveyed recently have formal policies in place to deal with growing climate change risks, according to a major new report issued today by Ceres.  The report was to have been delivered at a conference of the National Association of Insurance Commissioners (NAIC) that was cancelled due to Hurricane Irene.

The new report, Climate Risk Disclosure by Insurers: Evaluating Insurer Responses to the NAIC Climate Disclosure Survey, analyzes what 88 leading U.S. insurers are saying about climate change in public filings with state insurance commissioners – and the extent to which they’re factoring it Continue Reading →

Continue Reading ·

Low Risk Boards

News Corp got Andrew Dominguez and Eben Esterhuizen to thinking about why boards fail. They came up with the following:

  1. No Repercussions: Shareholder lawsuits don’t pose much of a threat to an incompetent board. Most U.S. companies incorporate in Delaware, where state laws exempt board members from financial liability for their actions.
  2. Poor Data: Some boards receive too little or too much information – or just plain bad information. This often occurs when a company’s management is trying to manipulate the Continue Reading →
Continue Reading ·

Economics of Good and Evil: The Secret Foundations of a Science

Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Streetby Thomas Sedlacek, explores the path dependency of modern Western economics through mythology, religion and fables. I wish the book had been published and influential forty-five years ago when I was a freshman economics major.

When I was an undergraduate student in economics we started with the moral/political arguments of Adam Smith, Thomas Malthus, Karl Marx, David Ricardo, J.S. Mill, and Alfred Marshall. I was so delighted with my chosen major that after the first semester, I signed up for sophomore year economics classes, which for us meant Samuelson. Continue Reading →

Continue Reading ·

Post-Modern Portfolio Theory: IRRC Research Award Available

The IRRC Institute announced a competition for research that examines the interaction of the real economy with investment theory. Two papers – one academic and one practitioner – will receive the new “IRRC Institute Research Award” along with a $10,000 award. Of course, we would like both prizes to go to CorpGov.net readers. One of many books you might want to read in preparing your paper is Corporate Valuation for Portfolio Investment: Analyzing Assets, Earnings, Cash Flow, Stock Price, Governance, and Special Situations by Robert A. G. Monks and Alexandra Reed Lajoux.

The following panel of renowned judges with broad finance and investment experience will carefully review submissions and select two winning papers: Continue Reading →

Continue Reading ·

Powered by WordPress. Designed by WooThemes