Those Unsung Stats

Good risk management, in whatever form it takes, is about increasing the company’s ability to hit its goals. For example, the attempt to avoid large losses serves to prevent the kind of adverse impact on the finances of the company that will cause it to miss its targets. Likewise, sophisticated models predicting market or price fluctuations allow the company to plan, invest and hedge in such a way that reaching a goal, if not assured, is more probable.It is often thought that in order to achieve this kind of security, one must trade some upside benefit. This is not always the case. Oddly enough, professional baseball has shown us how knowing the odds and tilting them in our favor can produce fantastic outcomes without trading away any upside potential.

For example, in his book Moneyball, Michael Lewis examines how the Oakland A’s have been able to produce consistently excellent results with far less money than their competitors. The manager of the A’s, Billy Beane, realized that the market overvalued certain statistics for certain players, such as RBI’s, and undervalued other more important statistics. By carefully modeling the correct statistics, he was able to purchase players that were technically undervalued based on these new calculations. He understood that the investment in a player is much like an investment in the market. If he could focus on metrics that indicated a player’s success or failure (loss versus gain), he would have a better probability of hitting the performance goals he had set.