Table Of Content(cid:2)
TrimSize:6inx9in Hubbard522034 ffirs01.tex V1-01/16/2020 6:49pm Pagei
The Failure of Risk
Management
(cid:2) (cid:2)
(cid:2)
(cid:2)
TrimSize:6inx9in Hubbard522034 ffirs01.tex V1-01/16/2020 6:49pm Pageii
(cid:2) (cid:2)
(cid:2)
(cid:2)
TrimSize:6inx9in Hubbard522034 ffirs01.tex V1-01/16/2020 6:49pm Pageiii
The Failure of Risk
Management
Why It’s Broken and
How to Fix It
Second Edition
Douglas W. Hubbard
(cid:2) (cid:2)
(cid:2)
(cid:2)
TrimSize:6inx9in Hubbard522034 ffirs01.tex V1-01/16/2020 6:49pm Pageiv
Thissecondeditionfirstpublished2020
©2020byDouglasW.Hubbard.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
EditionHistory
JohnWiley&Sons,Inc.(1e,2009)
Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinany
formorbyanymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise,
exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyrightAct,without
eitherthepriorwrittenpermissionofthePublisher,orauthorizationthroughpaymentofthe
appropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,
MA01923,(978)750-8400,fax(978)646-8600,orontheWebatwww.copyright.com.Requeststo
thePublisherforpermissionshouldbeaddressedtothePermissionsDepartment,JohnWiley&
Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011,fax(201)748-6008,oronlineat
www.wiley.com/go/permissions.
LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbest
effortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespecttothe
accuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimplied
warrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreatedor
extendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategiescontained
hereinmaynotbesuitableforyoursituation.Youshouldconsultwithaprofessionalwhere
appropriate.Neitherthepublishernorauthorshallbeliableforanylossofprofitoranyother
commercialdamages,includingbutnotlimitedtospecial,incidental,consequential,orother
damages.
(cid:2) Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,pleasecontact (cid:2)
ourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidetheUnited
Statesat(317)572-3993,orfax(317)572-4002.
Wileypublishesinavarietyofprintandelectronicformatsandbyprint-on-demand.Somematerial
includedwithstandardprintversionsofthisbookmaynotbeincludedine-booksorin
print-on-demand.IfthisbookreferstomediasuchasaCDorDVDthatisnotincludedinthe
versionyoupurchased,youmaydownloadthismaterialathttp://booksupport.wiley.com.Formore
informationaboutWileyproducts,visitwww.wiley.com.
LibraryofCongressCataloging-in-PublicationData
Names:Hubbard,DouglasW.,1962–author.
Title:Thefailureofriskmanagement:whyit’sbrokenandhowtofixit/
DouglasW.Hubbard.
Description:Secondedition.|Hoboken,NewJersey:Wiley,2020.|
Includesindex.
Identifiers:LCCN2019051494(print)|LCCN2019051495(ebook)|ISBN
9781119522034(hardback)|ISBN9781119522027(adobepdf)|ISBN
9781119522041(epub)
Subjects:LCSH:Riskmanagement.
Classification:LCCHD61.H762020(print)|LCCHD61(ebook)|DDC
658.15/5—dc23
LCrecordavailableathttps://lccn.loc.gov/2019051494
LCebookrecordavailableathttps://lccn.loc.gov/2019051495
CoverDesign:Wiley
CoverImage:©RomoloTavani/iStock.com
PrintedintheUnitedStatesofAmerica
10987654321
(cid:2)
(cid:2)
TrimSize:6inx9in Hubbard522034 ffirs01.tex V1-01/16/2020 6:49pm Pagev
Idedicatethisbooktomyentiresupportstaff:mywife,
Janet,andourchildren,Evan,Madeleine,andSteven,and
totheArmedForcesoftheUnitedStatesofAmerica.
(cid:2) (cid:2)
(cid:2)
(cid:2)
TrimSize:6inx9in Hubbard522034 ffirs01.tex V1-01/16/2020 6:49pm Pagevi
(cid:2) (cid:2)
(cid:2)
(cid:2)
TrimSize:6inx9in Hubbard522034 f01.tex V1-01/13/2020 3:19pm Pagevii
Contents
AbouttheAuthor xi
Preface xiii
Acknowledgments xvii
part one ANINTRODUCTIONTOTHECRISIS 1
Chapter1 HealthySkepticismforRiskManagement 3
A“CommonModeFailure” 5
Key Definitions: Risk Management and Some Related
(cid:2) Terms 8 (cid:2)
WhatFailureMeans 14
ScopeandObjectivesofThisBook 17
Chapter2 ASummaryoftheCurrentStateofRisk
Management 21
AShortandEntirely-Too-SuperficialHistoryofRisk 21
CurrentStateofRiskManagementintheOrganization 25
CurrentRisksandHowTheyAreAssessed 26
Chapter3 HowDoWeKnowWhatWorks? 35
Anecdote:TheRiskofOutsourcingDrugManufacturing 36
WhyIt’sHardtoKnowWhatWorks 40
AnAssessmentofSelf-Assessments 44
PotentialObjectiveEvaluationsofRiskManagement 48
WhatWeMayFind 57
Chapter4 GettingStarted:ASimpleStrawManQuantitative
Model 61
ASimpleOne-for-OneSubstitution 63
TheExpertastheInstrument 64
AQuickOverviewof“UncertaintyMath” 67
EstablishingRiskTolerance 72
SupportingtheDecision:AReturnonMitigation 73
MakingtheStrawManBetter 75
vii
(cid:2)
(cid:2)
TrimSize:6inx9in Hubbard522034 f01.tex V1-01/13/2020 3:19pm Pageviii
viii contents
part two WHYIT’SBROKEN 79
Chapter5 The“FourHorsemen”ofRiskManagement:
Some(Mostly)SincereAttemptstoPreventan
Apocalypse 81
Actuaries 83
War Quants: How World War II Changed Risk Analysis
Forever 86
Economists 90
ManagementConsulting:HowaPowerTieandaGood
PitchChangedRiskManagement 96
ComparingtheHorsemen 103
MajorRiskManagementProblemstoBeAddressed 105
Chapter6 AnIvoryTowerofBabel:FixingtheConfusion
aboutRisk 109
TheFrankKnightDefinition 111
Knight’sInfluenceinFinanceandProjectManagement 114
AConstructionEngineeringDefinition 118
RiskasExpectedLoss 119
DefiningRiskTolerance 121
(cid:2) DefiningProbability 128 (cid:2)
EnrichingtheLexicon 131
Chapter7 TheLimitsofExpertKnowledge:WhyWeDon’t
KnowWhatWeThinkWeKnowaboutUncertainty 135
The Right Stuff: How a Group of Psychologists Might
SaveRiskAnalysis 137
MentalMath:WhyWeShouldn’tTrusttheNumbersin
OurHeads 139
“Catastrophic”Overconfidence 142
TheMindof“Aces”:PossibleCausesandConsequences
ofOverconfidence 150
Inconsistencies and Artifacts: What Shouldn’t Matter
Does 155
AnswerstoCalibrationTests 160
Chapter8 WorseThanUseless:TheMostPopularRisk
AssessmentMethodandWhyItDoesn’tWork 163
AFewExamplesofScoresandMatrices 164
Does That Come in “Medium”?: Why Ambiguity Does
NotOffsetUncertainty 170
(cid:2)
