As I've been saying for some time, what organizations really need is a CRO, Chief Risk Assessment Officer, who would also be an expert in probabilities and simulation.
Just thought I'd point out, actuaries can also do enterprise risk management. Also, a lot of organizations do have a Chief Risk Officer.
From Wikipedia:
A main priority for the CRO is to ensure that the organisation is in full compliance with applicable regulations (chief compliance officer). They may also deal with topics regarding insurance, internal auditing, corporate investigations, fraud, and information security.
Unfortunately, this description is missing the point. Main existential risks come from the inside, like over-optimistic projections, sunk cost-based decisions, NIH syndrome behavior, rotting corporate culture, etc.
I see your point here, although I will say that decision science is ideally a major component in the skill set for any person in a management position. That being said, what's being proposed in the article here seems to be distinct from what you're driving at.
Managing cognitive biases within an institution doesn't necessarily overlap with the sort of measures being discussed. A wide array of statistical tools and metrics isn't directly relevant to, e.g. battling sunk-cost fallacy or NIH. More relevant to that problem set would be a strong knowledge of known biases and good training in decision science and psychology in general.
That isn't to say that these two approaches can't overlap, they likely could. For example stronger statistical analysis does seem relevant to the issue of over-optimistic projections you bring up in a very straightforward way.
From what I gather you'd want a CRO that has a complimentary knowledge base in relevant areas of psychology alongside more standard risk analysis tools. I definitely agree with that.
From what I gather you'd want a CRO that has a complimentary knowledge base in relevant areas of psychology alongside more standard risk analysis tools. I definitely agree with that.
Yes. A CEO is by nature an optimist, with a "can do" approach. A CRO would report to the board directly to balance this optimism. This way the board, the CEO and the company will not be blindsided by the results of poor decisions, or anything else short of black swans. Currently there is a lip service to this approach in the SEC filings under possible risks and such.
Of course, this is a rather idealistic point of view. In most public companies the board members do not share in the troubles of their company, only in its benefits, so it would be easy for them to marginalize the role of the CRO and restrict it to checking for legislative compliance only. No one likes hearing about potential problems. Besides, if the CRO brings up an issue before the board, assigns a high probability to it, but no action is taken and the risk comes to pass, the board members might be found responsible. They would never want that.
Yikes. Certification for probabilists. Certified methods. We'd still be following the frequentist methods of the first half of the 20th century if we had certification back then.
One of the interesting bits of The Theory That Would Not Die is that the actuaries - the people with the existing set of certifications, which you seem to find so repugnant - were some of the only Bayesians in the world, they just didn't use that term or realize that's what their methods were based on.
IIRC, the book gives it as a much more direct meaning: the original actuaries were forced by Teddy Roosevelt or someone's programs to quickly come up with policies for things that had never been covered before and so could not be given clear frequentist justifications, so they used Bayesian methods.
It strikes me as a lot more reasonable to say that every large firm should have a department of simulation, dedicated to using computer simulation instead of spreadsheets to make forecasts of all types.
computer simulation instead of spreadsheets
I assume you mean, "simulation as opposed to simple numerical projection."
But I'm not sure this is really addressing the problems with risk management in large firms. My impression is that we don't really know what to simulate or what the tail risks are. Adding computers doesn't solve that problem.
As an aside: I suspect that Excel or other spreadsheet is a very reasonable programming framework for doing simulations in a business context. Business analysts can do some pretty impressive spreadsheet tricks...
But I'm not sure this is really addressing the problems with risk management in large firms. My impression is that we don't really know what to simulate or what the tail risks are. Adding computers doesn't solve that problem.
Being that this has been my job for the last year, you're in my experience mostly right. The biggest problem up to now is in risk modeling, not in the application of the models, both in evaluating single risks and (especially) in doing risks aggregation. Many of the existing models for some common risks are also analytically solvable, and don't even need simulations to be performed.
For how much I like the OP's idea, I don't think that we are realistically at the level where such a proposal would give the best improvement to the current situation.
Actuarial work is the only high-paying career path I know of where non-university certifications count as something significant on one's resume. Anyone have any ideas on why this is?
(I'm dreaming about an educational system where teaching and certifying are decoupled, so the way to run a profitable education company is to teach people effectively, as measured by some test, rather than run an old and prestigious institution. The actuary field seems like the closest thing to what I'm dreaming about, so I'm wondering what's made it different.)
Not in the relevant sense. Most bar exams require a J.D. (i.e. graduation from law school). Exceptions exist (California is one example), but the norm is so strong that most people capable of passing the bar exam without law school choose to attend law school anyway to avoid the social resistance.
Stanford Professor Sam Savage (also of Probability Management) proposes that large firms appoint a "Chief Probability Officer." Here is a description from Douglas Hubbard's How to Measure Anything, ch. 6:
Hubbard adds some of his own ideas to the proposal: