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The Failure of Risk Management: Why It's Broken and How to Fix It (Hardcover)

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Editorial Reviews

Product Description

An essential guide to the calibrated risk analysis approach

The Failure of Risk Management takes a close look at misused and misapplied basic analysis methods and shows how some of the most popular "risk management" methods are no better than astrology! Using examples from the 2008 credit crisis, natural disasters, outsourcing to China, engineering disasters, and more, Hubbard reveals critical flaws in risk management methods–and shows how all of these problems can be fixed. The solutions involve combinations of scientifically proven and frequently used methods from nuclear power, exploratory oil, and other areas of business and government. Finally, Hubbard explains how new forms of collaboration across all industries and government can improve risk management in every field.

Douglas W. Hubbard (Glen Ellyn, IL) is the inventor of Applied Information Economics (AIE) and the author of Wiley's How to Measure Anything: Finding the Value of Intangibles in Business (978-0-470-11012-6), the #1 bestseller in business math on Amazon. He has applied innovative risk assessment and risk management methods in government and corporations since 1994.

"Doug Hubbard, a recognized expert among experts in the field of risk management, covers the entire spectrum of risk management in this invaluable guide. There are specific value-added take aways in each chapter that are sure to enrich all readers including IT, business management, students, and academics alike"
—Peter Julian, former chief-information officer of the New York Metro Transit Authority. President of Alliance Group consulting

"In his trademark style, Doug asks the tough questions on risk management. A must-read not only for analysts, but also for the executive who is making critical business decisions."
—Jim Franklin, VP Enterprise Performance Management and General Manager, Crystal Ball Global Business Unit, Oracle Corporation.



From the Inside Flap

The 2008 credit crisis, terrorism, Katrina, computer hackers, and air travel disasters all have something in common-the methods used to assess and manage these risks are fundamentally flawed. If risks cannot be properly evaluated, risk management itself becomes the biggest risk. The Failure of Risk Management shows you how to identify and fix these hidden problems in risk management.

Ineffective risk management methods, often touted as "best practices," are passed from company to company like a bad virus with a long incubation period: there are no early indicators of ill effects until it's too late and catastrophe strikes. Exploring why risk management fails—the failure to measure and validate methods as a whole or in part; the use of components known not to work; and not using components that are known to work—The Failure of Risk Management shows you how to measure the performance of risk management in a meaningful way, identify where risk management is broken, and fix it.

Respected expert and bestselling author Douglas Hubbard-creator of the critically praised Applied Information Economics (AIE)—uses real-world examples to reveal the serious problems in our current approaches to risk analysis. Hubbard skillfully illustrates how to use a calibrated risk analyses approach, and the many benefits that go along with it, along with checklists and practice examples to get you started.

One of the first resources to apply risk management across all industries, The Failure of Risk Management provides you with the tools you need to hit the ground running with radically better risk management solutions.

Here, you'll discover:

  • The diversity of approaches to assess and mitigate risks
  • Why many influential methods-both qualitative and quantitative don't work
  • Why we shouldn't always trust assessments based on "experience" alone
  • The fallacies that stop you from adopting better risk management methods
  • How those who develop models of risks justify (in error) excluding the biggest risks
  • Adding empirical science to risk management
See all Editorial Reviews

Product Details

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Douglas W. Hubbard
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Front Cover | Front Flap | Table of Contents | First Pages | Index | Back Flap | Back Cover | Surprise Me!
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Customer Reviews

32 Reviews
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Average Customer Review
4.6 out of 5 stars (32 customer reviews)
 
 
 
 
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27 of 28 people found the following review helpful:
5.0 out of 5 stars An Important Addition To A Risk Manager's Library, May 5, 2009
By Rich Johnson (Bay Area, CA) - See all my reviews
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How do we know if our risk management methods are working? Would we notice if they were not working? What are the consequences if they are not working? These are the three basic questions that Douglas Hubbard asks in his book The Failure of Risk Management.

In this book Mr. Hubbard lays out the basics of risk management and explains why many risk management methods are worse than useless. He also provides some ideas and first steps to fix the problem.

Here's a brief walk though 'The Failure of Risk Management':

Part I introduces the history of risk management and the problems with modern risk management methods. Independent events, for instance, are often times not independent at all. This common-mode failure is unaccounted for by many managers, yet can be devastating in an emergency.

Part II of the book goes in depth with some of the problems and failures of risk management, and to me was the most interesting part of the book. Chapter 4 is called The "Four Horseman" of Risk Management, and describes the differences between what the author considers the four main classes of risk managers. The four classes are actuaries, "war quants," economists, and management consultants. Each group has distinctly different methods and areas of expertise, as well as different levels of validation.

Chapter 5 is about how risk should be defined, and why different people may actually be talking about different things when they discuss volatility and risk. Chapter 6 breaks down why humans are not good at subjective methods (which lays the ground work for later chapters introducing quantitative methods). There are a few "calibration" tests available for you to see how overconfident you are in your decision making. These are pretty interesting, and even after reading about overconfidence I still did poorly on them.

Chapters 7, 8, and 9 talk about problems with subjective scoring methods, problems with describing one-off events, and the problems with some quantitative models. The author talks about "black swans," as described by Nassim Nicholas Taleb, and how they relate to modeling. Many times people believe that events can't be modeled, but the author believes this is not so.

The last section of the book, Part III, gives some ideas on how to fix risk management. Adding empiricism is a big start, as well as calibration of subjective human inputs. Many companies build and use models, but then they don't actually bother to see how well the things have performed in the past. I will leave the rest of the solutions for you to read in the book.

Recommendation:

First off, the author says this book is geared towards all types of risk management, and all types of industries, and I think this is true. The author uses a wide variety of examples from airplane engine failures to volcano eruptions. But I still feel like this book is more geared towards enterprise risk management, and less towards the already quant heavy fields such as actuarial science or credit risk management. But it was an interesting read nonetheless.

It seems like in the past 20 years there have been several so-called "once-in-a-lifetime events," such as the floods of Hurricane Katrina or any of the financial crisis, including 1987, 1998, 2000, or 2008. I wish I had the money to buy this book for every person who ever said "no one saw that coming."

I think this is a great book for anyone who deals with the potential for risk, loss, or damage - no matter if it is financial, personal, or physical. When the stakes are high we should be careful relying on a risk matrix developed by a management consultant, and Douglas Hubbard will tell you why. If you work in risk management, or if you have influence on the operational strategy of some organization, then this book is a must read.
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6 of 6 people found the following review helpful:
5.0 out of 5 stars Best read I've had on the topic, September 9, 2009
Hubbard sets out with a big goal and meets it. He gives the most complete explanation of how certain flaws evolved in risk management. While Hubbard's historical analysis is not as detailed as Against the Gods: The Remarkable Story of Risk, the Failure of Risk Management is much more in depth about the details of the flaws about models use for all aspects of risk management. The next time someone is pushing a new, unproven, risk management method down our throats in our organization, this is the book I'll push back with. Show me the evidence it works, or don't waste my time. Bravo.
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8 of 9 people found the following review helpful:
5.0 out of 5 stars Great tool for "hard" and "soft" risk analysis, August 22, 2009
Some risk analysis methods work. Some don't. Hubbard explains how to tell the difference. The good news is that for every "placebo" method that gives only comfort but not real benefits, there is one that really does work. The bad news is that the most effective methods are the least widely used and the least effective methods are the most widely used.

I like the survey he includes about Monte Carlos. He makes a solid case that, without training, most experts will be statistically overconfident when assessing subjective odds. But since most Monte Carlo models have at least some subjective estimates, this means that most will understate risk. I haven't heard anyone point out that problem much less a way to fix it.

Correcting problems with Monte Carlo models is important because, once these issues are addressed, it is one of the most powerful tools available to the Chief Risk Officer. Hubbard provides several free spreadsheet downloads on his book's companion website that help the reader understand what might be complex calculatins.

This book is the best risk management investment I've made.
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Most Recent Customer Reviews

5.0 out of 5 stars Finally, RM that Matters
Hubbard puts every popular risk management method under the microscope and asks "Does this really work?" and "How would we even know?" This will not be a disappointment. Read more
Published 3 days ago by Nate Lewis

5.0 out of 5 stars A great addition to the field
This book is a great addition to any Risk managers library. The Failure of Risk Management tells of the shortcomings in the field and how to fix them. Read more
Published 7 days ago by Michael J. Hodgson

1.0 out of 5 stars A few cogent points but overall a great disappointment
The author makes a few cogent points but his treatment is unimpressive on the whole. For example, Hubbard makes a point of saying that it is important to evaluate the... Read more
Published 1 month ago by Bob Ross

5.0 out of 5 stars Excellent Resource
This is an incredibly well written book. I would recommend it to anyone in IT. It will open your eyes and could scare you at the same time. Read more
Published 1 month ago by Burt Jackson

2.0 out of 5 stars Clearly unaware of engineering risk assessment
Mr. Hubbard provides significant input regarding the failures of probabilistic risk assessment. Clearly, he lacks depth regarding engineering risk assessment that has been... Read more
Published 1 month ago by TM2

5.0 out of 5 stars Most importantly, how to fix it
This is a fascinating review of major problems with risk management and how to fix them. The author points out that unlike many other thing, the effectiveness of risk management... Read more
Published 2 months ago by R. Hobbes PhD

5.0 out of 5 stars Risky thinking
This is a very handy work on risk management. Douglas Hubbard, the author, takes the "field" of risk management to task for many practitioners simply not having a clue and doing a... Read more
Published 2 months ago by Steven A. Peterson

1.0 out of 5 stars Book never delivered
I would love to review this book, which I ordered from Amazon 4 months ago, but it was never delivered. Read more
Published 3 months ago by My Cameron Hay

5.0 out of 5 stars I wish I would have read this when it was first released
The month this book was released, my firm spent a lot of money on some new high-risk projects. On the four biggest projects (totalling over 100 million dollars), a "formal" risk... Read more
Published 3 months ago by Cryophysics

5.0 out of 5 stars Great Book
It is an excellent source for Risk Management-

T Dhital-Oracle Certified Professional (OCP, Ph. D.
Published 3 months ago by William A. Waits

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