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Thursday, November 8, 2012

Monte Carlo Example

A recent discussion on the G31000 forum debates the importance of Monte Carlo but it resulted in me promising a model to the group, a straight forward and fundamental model on Monte Carlo?

I have talked about Monte Carlo before on this blog and in more than one place. However, the effort today is to develop a Monte Carlo simulation in Excel that works for operational risk losses, rather than in market risk or credit risk where the technique is so often found. The objective is to build a fully working Microsoft Excel model which isn't just statistical theory but actually exemplifies the Monte Carlo simulation process in practice.

This article explains such a model and there is a link at the end of this posting that will allow you to download the spreadsheet, if you so desire.

Friday, November 2, 2012

Resolving Risk Disputes

The question today is; does the use of a risk framework such as the one proposed in the ISO 31000 risk standard reduce disputes between managers in a company?

A possible upside we may be seeking from a risk framework is the improvement in the sharing of risk knowledge, as well as the communication of business intel across a company. The ability for a risk framework to assign accountability to threats would surely be even more ideal.

One would hope that if managers can formally describe the types of risks they face in their daily work and communicate this insight to internal customers, staff would become more understanding and empathetic to problems or disruptions when they occur. Oversight and disclosure is often fantastic grease for the emotional machine of sympathy.

It could of course go the other way, the risk framework may drive arguments from differing opinions on risk treatment, bickering over risk budgets and divides on ownership and accountability of threats.

In the last twenty-four hours, what did the G31000 forum vote for in our poll?