12 Aug 2011  Working Papers

From Counting Risk to Making Risk Count: Boundary-Work in Risk Management

Executive Summary — According to previous research, the cycle of risk management includes counting risk through quantification and aggregation; controlling risk until something like a financial crisis occurs; and then calculating new risks in an attempt to avoid similar crises in the future. In this paper, through case studies carried out at several banks, Harvard Business School professor Anette Mikes introduces the idea that this cycle is contingent upon a "calculative culture," which steers organizations toward successful risk management practices. Key concepts include:

  • The paper focuses largely on the different approaches of two major banks. The first relies heavily on quantifiable risks. The bank's officers measure risk management success according to how well the bank adheres to its model-based risk-measurement methodologies.
  • The officers at a second bank concerned themselves less with the measurable risk types than with the immeasurable risks of the future, choosing to focus more on anticipation than on analyzing the past. They showed that even without counting risks—and even absent of a traditionally calculative culture—risks can still count.
  • The financial crises of 2008-2009 have some experts convinced that traditional counting-focused, model-based risk management doesn't really work. In the future, "risk envisionment" may play a bigger role.

 

Author Abstract

For two decades, risk management has been gaining ground in banking. In light of the recent financial crisis, several commentators concluded that the continuing expansion of risk measurement is dysfunctional (Taleb, 2007; Power, 2009). This paper asks whether the expansion of measurement-based risk management in banking is as inevitable and as dangerous as Power and others speculate. Based on two detailed case studies and 53 additional interviews with risk-management staff at five other major banks over 2001-2010, this paper shows that relentless risk measurement is contingent on what I call the "calculative culture" (Mikes, 2009a). While the risk functions of some organizations have a culture of quantitative enthusiasm and are dedicated to risk measurement, others, with a culture of quantitative skepticism, take a different path, focusing instead on risk envisionment, aiming to provide top management with alternative future scenarios and with expert opinions on emerging risk issues. In order to explain the dynamics of these alternative plots, I show that risk experts engage in various kinds of boundary-work (Gieryn, 1983, 1999), sometimes to expand and sometimes to limit areas of activity, legitimacy, authority, and responsibility.

Paper Information