To reduce risk, expand your awareness of the risks and what’s happening in your jurisdiction

Bravado and confidence, admirable in some fields, can be disastrous if unchecked in high-risk professionals

In the past few months we’ve been reading about the public inquiry into Dr. Charles Smith, the Ontario pathologist whose questionable testimony led to wrongful convictions, and the financial scandal generated when French trader Jerome Kerviel evaded bank controls leading to the loss of 4.9 billion euros at Societe Generale SA.

The Dr. Smith case is particularly disturbing. Smith was a forensic child pathologist with no training in forensics - none was required or available in Canada when he rose to prominence. In frequent testimony as an expert witness, Smith, by his own admission, supported the prosecution in disregard of his obligation to provide balanced, objective testimony. Smith’s poor practices and mistakes, many of which date back to the early ’90s, resulted in wrongful imprisonment and financial and emotional devastation for several Ontario families.

Through the lens of risk management

The Smith (and Kerviel) examples illustrate how we are underestimating risk and using inadequate controls.

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What was he thinking! If it offends your mother, your family, your constituents, or your professional colleagues, don’t do it!

PERSONAL CONDUCT - WHAT’S THE HARM?

When senior officials or professionals behave contrary to society’s mores or expectations, they undermine the reputations of their office or profession as well as themselves.

Look no further than the top news story of the week, and this week it’s all about New York Governor, Eliot Spitzer. His professional reputation is in shreds, a reputation built as as N.Y. Attorney General and as a crusader against corporate wrong doing. In the parlance of a regulatory client, his behaviour is DDU (disgraceful, disgusting, unprofessional). Based on reports, the Governor used the services of a prostitution ring, repeatedly. What was he thinking? What damage has he done to the reputation of the institutions he leads?

There are character requirements for public office and professions. Some of these are embedded in law and others are implicit in society’s expectations. The intangibles - trust and confidence - make a difference to whether people will accept leadership, use services or take advice. Plus shocking news stories divert public attention from the business at hand.

The impact is real and the likelihood of human misbehaviour, it seems, is pretty high.

“Why Prediction Markets Beat Political Polls” is a headline on the cover of the March 2008 issue of Scientific American. The headline is a bit misleading because why or how prediction markets work is not all that clear. However, the fact that they outperform polls, based on the evidence of the Iowa Electronic Markets (IEM), is indisputable: The IEM example covering U.S. Federal elections between 1988 and 2004 demonstrates that markets beat polls 3 times out of 4. This is as true on the day of the election as it is 100 days in advance.

The basic distinction between polling and a prediction market, using the example of an election poll, is that the poll takes a representative sample to find out how the group is going to vote. Prediction markets allow a diverse group of people to predict (or bet) who’s going to win.

With risk-based regulation, there are times when the consequences of a wrong decision are high enough that a best guess isn’t good enough. Prediction markets, or information markets, as they are sometimes called, present a technique of tapping into the “wisdom of the crowds” to get a better reading. New types of markets can be developed to assist in regulatory decision making. Already, prediction markets have proven themselves in diverse areas such as disease forecasting, Hollywood box office success, and economic and financial forecasts.

More information

Information Markets: A New Way of Making Decisions. This document captures the proceedings of a 2004 regulatory conference about information markets. The conference was hosted by the “Reg-Markets Center,” officially the AEI Center for Regulatory and Market Studies (formerly known as the AEI-Brookings Joint Center).

Our review of Wisdom of the Crowds by James Suroweicki.