THE BLOG

Is Loss of Humanity the Real Risk of Risk Management?

09/24/2012 02:47 pm ET | Updated Nov 24, 2012

I recently fell victim to something called "risk management." After a bank mistakenly tried to debit $2,500 instead of $250 for a credit card payment, my bank denied the transaction. Shortly after, because of an emergency hospital stay, I was one day late in making a deposit for another credit card payment. While this was unavoidable under the circumstances, it was certainly my fault.

Despite my otherwise stellar record, the bank's computer model put me into a high-risk category and placed a seven day hold on my check (which incidentally had already cleared overnight). Then, without informing me, the bank denied the credit card payment a second time.

Next, because of this, the credit card bank blocked my credit card and put their own seven day hold on my check because now their computer model flagged me as "high-risk" even though I had a ten-year perfect record of paying off all my balances at the end of each month. In order to unblock my account, which now will be red-flagged for several months, I had to get my "relationship banker" on the line with the credit card bank to explain that my funds were good.

When I implored the credit card company's supervisor to look at my record and do the right thing, he apologized but emphasized that "risk management" had his hands tied. They had their procedures. Unfortunately for all of us, these procedures disempower companies, workers, and customers and disconnect us from our uniquely human ability to make common-sense judgments that factor empathy and history into the equation.

I believe this trend -- to disconnect ourselves from human consequences while focusing on numbers only -- is as potentially destructive to the future of businesses that depend on customer relationships as it has been to the political process, which has become more about delivering hot-button talking points to improve polls and generate votes than substantive ideas that solve problems.

Wikipedia defines risk management as "the identification, assessment, and prioritization of risks .... followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities."

Of course, engineers have used risk management to assess the probability of the International Space Station falling out of orbit and other such things for years. Actuaries have used risk management to assess the probability of a person dying after purchasing life insurance for years. But now risk management is replacing relationships in many more facets of business. In other words, today people matter only when the mathematical risk:reward ratio is favorable.

At the end of the day, risk management is Darth Vader to values. "Doing the Right Thing" is easily compromised when it doesn't fit into the right risk profile.

One example is a major insurance company that asked its interns to determine if a client - in this case a major hockey team - should have been required to put netting around the rink in the event that a stray puck escaped and hurt or killed a spectator. (The NHL in fact had mandated protective netting above the goals after a 13-year-old girl died two days after she was struck in the head at a Columbus Blue Jackets game in 2002.)

The interns determined that prudent risk-management principles would have overruled NHL commissioner Gary Bettmann's decision to require the netting because, in his words, "...it's the right thing to do after what has happened." The interns said that the stray puck didn't happen with enough frequency to warrant ruining peoples' views or incurring additional costs.

From this it's easy to see how, in risk management practices, strong instinctive beliefs about right and wrong are missing from the mathematical equation or computer model. Numbers trump wisdom, compassion, empathy and even common sense. Models such as this played an enormous role in the 2008 collapse of the nation's financial system which triggered the worst recession in this country since the Great Depression.

It used to be that a customer or small business person walked into a bank branch and developed a relationship with the branch manager. The branch manager came to know the customer, the customer's family, and the customer's character. Bankers honed their judgment, taking the measure of the customer on the "three Cs: Credit-worthiness, Competence and Character," with character often being the most important factor. Many unlikely yet very successful enterprises got funded because a banker believed in the customer's grit, tenacity and integrity.

Now, robotic risk-management departments with computer models and ivory-towered underwriters run the show. But managing risk in this way at best profiles people and at worst devalues humanity. It denies the impact of character, ranking it as less valuable than hard data.

It's hard to imagine an innovation economy thriving, or smart, hardworking individuals breaking out of poverty, in a system where this disturbing trend prevails. Are we becoming a nation where numbers are valued more than people? To me, it seems so, and the freedom to make one's own decisions and to benefit from another's compassion is the casualty.

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