Spring 07

Roger Martin: Underestimating the Risk of the Status Quo
Thought Leader Interview: Daniel Kahneman
Dolly Chugh and Max Bazerman: Bounded Awareness
The Magazine of the Rotman School of Management / Spring 2007
The Risk Issue
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The Risk Issue Spring 2007

Features
4 Underestimating the Risk of the Status Quo by Roger Martin Canadian rms are profoundly inuenced by our capital markets narrow denition of risky behaviour, and the unfortunate result is a dearth of globally-competitive companies. 14 Countering the Biggest Risk of All by Adrian Slywotzky and John Drzik How to anticipate and manage strategic threats systematically and in the process, turn some of them into growth opportunities. 20 Bounded Awareness by Dolly Chugh and Max Bazerman People tend to overestimate their own awareness and underestimate its bounds. As a result, they often overlook information that is crucial to making successful decisions. 26 How Private Action Can Reduce Public Vulnerability by Karen Christensen Risk expert Erwann Michel-Kerjan explains how our increasing interconnectedness breeds risk, and why the private sector must take a leadership role in assuring a safer environment. 32 Hulls Laws: What We Can Learn from Derivatives Mishaps by John Hull High prole losses have made people wary of derivatives, which is unfortunate, because they can provide a very efcient way to manage risks. 40 A Primer on the Management of Risk and Uncertainty by David Robinson Effective risk management involves preparing for known unknowns and unknown unknowns. Heres how to get started.
14 26 54
46 Dancing with Strangers by Joel Baum, Timothy Rowley, Andrew Shipilov and You-Ta Chuang While maintaining ties with safe past partners stabilizes inter-organizational networks, non-local ties with strangers can sow the seeds of network change and innovation. 50 Achieving Optimal Agreements by Geoffrey Leonardelli, Adam Galinsky, Gerardo Okhuysen and Thomas Mussweiler Focusing on promoting success rather than preventing failures is a powerful tool for achieving ones goals at the bargaining table. 54 Embracing Risk to Learn, Grow and Innovate by Ryan Jacoby and Diego Rodriguez In the world of design thinking, acknowledging risk is the rst step towards taking action, and with action comes insight, evidence and real options.
Idea Exchange
In Every Issue
3 From the Dean 10 Thought Leader Interview: Daniel Kahneman 37 Presidents Corner: Michael Zerbs (MBA 89) 91 News Briefs 98 Rotman Experience: Roger Thompson (MBA 07) 100 Alumni Proles 102 Alumni Capsules 105 Class Notes 120 Upcoming Events
Climate change policy should not be based on mental models that violate the most fundamental physical principles.
John Sterman, p.63
60 The Big Picture: John Sterman and Linda Booth Sweeney 64 Questions For: David Apgar 67 Questions For: Ian Bremmer 70 Point of View: Michael Mauboussin 72 Faculty Focus: Lisa Kramer 74 Questions For: Harrison Schmitt 77 Point of View: Amy Edmondson and Mark Cannon 80 Questions For: Kathleen Carley 83 Faculty Focus: Laurence Booth 86 Point of View: Lisa Bolton 88 Point of View: John Adams
37
67 72
10
Rotman Magazine Spring 2007 Rotman magazine is published three times per year for alumni and friends of the Joseph L. Rotman School of Management, University of Toronto. Subscriptions are available for $99 per year. To subscribe, go to www.rotman.utoronto.ca/subscribe. Editor Karen Christensen (christen@rotman.utoronto.ca) Contributors Belmira Amaral, Steve Arenburg, Joel Baum, Laurence Booth, Lisa Kramer, Geoffrey
Leonardelli, Roger Martin, Ken McGufn, James Milway, Karen Papazian, Catherine Riddell, Jack Thompson, Stephen Watt
Design Underline Studio Inc. Cover Corbis Images
Copyright 2007. All rights reserved. To submit a change of address, please contact Rotman Magazine, Joseph L. Rotman School of Management, 105 St. George Street, Toronto, on m5s 3e6 Tel: 416-978-0240 Fax: 416-978-1373 E-mail: alumni@rotman.utoronto.ca Web: www.rotman.utoronto.ca
The simple truth today is that if youre not managing risk, you cant claim to be managing your organization.
From the Dean:
While businesses insure themselves against many traditional risks, they often ignore the most important ones: the strategic risks that can disrupt or even destroy them. In Countering the Biggest Risk of All on page 14, Mercer Management Consultings Adrian Slywotzy (hailed by Industry Week as the successor to Peter Drucker) and John Drzik describe how to anticipate and manage these threats systematically and in the process, turn some of them into growth opportunities. Just as globalization has forced political leaders to adjust to the rigors of a non-stop marketplace, the pace of political events around the world requires that corporate leaders confront the links between geopolitics and business performance. On page 26, Erwann Michel-Kerjan, managing director of Whartons Risk Management and Decision Processes Center, discusses How Private Action Can Reduce Public Vulnerability. The Rotman Schools own John Hull is a world-renowned credit and derivatives expert whose industry-standard textbook on the topic is now in its seventh edition. Who better to advise on how to navigate the complex world of derivatives. Hulls Laws: What We Can Learn from Derivatives Mishaps is on page 32. Uncertainty encompasses both identifiable trends whose depth and timing can only be guessed at, and unforeseen sudden events whose effect is immediate. On page 40, David Robinson of Berkeleys Haas School of Business provides A Primer on Risk and Uncertainty. Elsewhere in this issue, MITs John Sterman explains why so many people are complacent about climate change on page 54; author and consultant David Apgar explains risk intelligence on page 64; the head of the worlds largest political risk consultancy, Ian Bremmer, discusses the links between political and economic risk on page 67; and Rotman Professor Lisa Kramer talks about decision making under risk on page 72. We can no longer afford to be reactive in our management of risk. Todays most effective leaders view risk management as an integral part of strategic management, and understand that a risk strategy should work across various operating units. What is emerging from the rubble of our embattled era is a leadership model that rebalances traditional attitudes toward two critical decision factors: risk and control. Todays leaders must increase their tolerance for and comfort level with risk; and at the same time, be willing to have much less personal control. While risk can never be eliminated entirely, rms that take charge of their destinies will be able to navigate their way through the external landscape no matter how complex it becomes. Above all else, make heroes out of your risk takers, because they are our strongest assurance of progress toward a safer, more prosperous world.
Rotman Magazine Spring 2007 / 3
Roger Martin
The Risk Issue

If it seems the world is a riskier place than ever, youre not imagining it. While the age-old balance between risk and reward is the very essence of business, risk today appears in a bewildering variety of guises. The bulk of todays business decisions are made with incomplete information and in the face of an uncertain future. In 2006, for the rst time ever, risk was named the major concern for C-level leaders in Accentures annual executive issues survey. Todays overall perception of heightened risk is fostered by more than terrorism: the increased interconnectedness resulting from globalization has heightened the sense of peril. A joint study by A.T. Kearney and Belgiums Centre for Research on the Epidemiology of Disasters conrms that rapid globalization has coincided with an escalating frequency of both man-made and natural disasters from tsunamis to earthquakes to transport calamities. In the face of this conuence of factors, many of todays leaders feel ill-prepared to deal with our increasingly risky world. While the external environment continues to shift out of balance, many choose instead to focus on strengthening internal controls, and as a result, they often lack an ability to understand the real risks associated with their global operations. While risk management is best known as a nance-industry term, it is time to reclaim it to a much broader usage. The simple truth today is that if youre not managing risk, you cant claim to be managing your organization. Our goal in this issue of Rotman is to add to your risk-preparedness toolbox so that you can better identify, analyze, take actions to address and even benet from it. I kick things off on page 4 with Underestimating the Risk of the Status Quo, where I argue that the Canadian capital markets have a narrow view of what constitutes risky behaviour, and that their neglect of the risks associated with the status quo negatively affects the competitiveness of Canadian rms.
Canadian-owned rms are profoundly inuenced by the Canadian capital markets narrow denition of risky behaviour, and the unfortunate result is a dearth of globally-competitive Canadian companies.
Underestimating the Risk of the {Status Quo}

By Roger Martin History shows that the general view held by the Canadian capital markets is that it is risky for Canadian rms to take steps to grow aggressively abroad, which implies that it is safer for these rms to stay in Canada. I would argue that exactly the opposite is true, and that capital markets participants institutional and retail investors, equity analysts, investment managers, and rating agencies need to develop a more productive understanding of risk in order for Canada to prosper in a globalizing world. For most Canadian rms, sitting at home in Canada and taking only minimal steps towards internationalization is one of the riskiest things they can do, and it will result in their eventual demise. While going abroad is also risky, it must be compared rigorously to the risk of staying at home to put the relative risks in productive context. I do not believe that the Canadian capital markets community makes this critical comparison, and as a result, it inadvertently discourages Canadian rms from going abroad and becoming genuinely global. The end result is starkly evident if we look at the statistics: Canada produces far-too-few globally competitive companies for its own long-term health. Exhibit A: Thomson and West Publishing Thomson Corporation is one of 72 Canadian companies that has
achieved status as one of the top ve in global sales in its industry worldwide. In fact, Thomson makes this list easily: by the
4 / Rotman Magazine Spring 2007
measures of most observers, it is #1 in the world in information services provision across sectors such as nance, science, health care, legal and regulatory. As a member of the Thomson board, I can disclose that not a board meeting goes by where my fellow board members and I dont thank our lucky stars for the fortitude of the leadership in place at Thomson in 1996. That was the year that Thomson spent what was viewed as a whopping US$3.4 billion to buy privately-owned West Publishing, then the leading information services provider in the legal and regulatory space. Today, the legal and regulatory business is the most protable business in the entire Thomson portfolio, the one that contributes the most to its market capitalization, and the one that has propelled the company from a signicant player in the information services business to the biggest, and what many consider the best, in the world. So the decision to buy West Publishing must have been a nobrainer, right? Wrong. At the time, Thomson faced withering criticism for the purchase, which was considered too risky on a variety of dimensions. The price was considered a stunner (The Globe and Mail, February 27, 1996) and the win in the bidding war for West a pricey victory (The Financial Post, February 27, 1996). In the words of one reporter: it reafrms that Thomson will pay just about anything for an information business (Media Daily, February 26, 1996.)
Given the reaction it received, its not surprising that the companys stock price fell on the announcement, and two rating agencies immediately downgraded Thomson. If the company had held a referendum among outside shareholders on whether to follow through with the deal or cancel it, I suspect it would have been voted down. Fortunately for those shareholders, Thomson was led by the late-great Ken Thomson, whose managerial hallmark was long-term vision, and the transaction was completed over the howls of protest from the Canadian capital markets. Eleven years later, it would be inconceivable for Thomson to consider parting with the West franchise, even at a huge multiple of the pricey and stunning purchase price. Thomsons market capitalization of $11.6 billion the day after the announcement has almost tripled to $31.7 billion in the intervening period, and a meaningful chunk of that increase is attributable to leveraging the West franchise. Unfortunately, this is anything but an isolated case for Canadian rms taking steps toward global competitiveness. Similar examples abound. When Toronto Dominion Bank bought Waterhouse in 1996 to become a top three player in discount brokerage, TD was seen as risking its strong and successful Canadian discount brokerage business with a reckless acquisition. Likewise, when Nortel bought Bay Networks in 1998 to participate in the emerging data transmission/router business, it was considered a risky bet-the-
company move; and when smaller Premdor bought the larger Masonite International business from International Paper in 2000 to leapfrog into global leadership in the door manufacturing business, it was frowned upon by the capital markets. The same held true for Weston Foods purchase of Best Foods bakery business in 2001 and Couche-Tards transformational purchase of Circle K in 2003. Even Dominic DAlessandros master stroke purchase of John Hancock by Manulife in 2003 which has resulted in Canada owning one of the top ve life insurers in the world was the subject of much criticism. Even internal developments to build global capability have been viewed askance. When Bombardier made the decision to develop the Regional Jet in 1992 a decision that propelled the company into the global elite of aerospace rms the dominant capital market view was that this was riskier than sticking to the production of Dash turboprops. Of course, all of the moves described here were risky in a variety of ways. Big acquisitions and new product introductions are, by denition, risky. And there are plenty of stories of Canadian companies going a bridge too far with big foreign acquisitions. Interestingly, a majority are in a single sector: retail. But that is a subject for another day. The question is this: why have the Canadian capital markets frowned so unanimously on the above-mentioned deals, each of
The logic seems to be that, since we are already doing what we are doing, it cant be terribly risky. This, unfortunately, is a very awed assumption.
which was critical to the emergence of a Canadian firm as a global player? It is not necessarily because the Canadian capital markets overestimate the risk of new ventures. Rather, I believe that they underestimate the risk of the status quo. Through careful analysis, they estimate the acquisition/new ventures integration risks, the risks of not understanding the new market, the risk of increased leverage, and so on. Inevitably, their net assessment is that the new initiative in question represents little more than risk on top of risk. In the West acquisition by Thomson, observers were quick to enumerate the associated risks: there was the risk of the value of Wests product falling due to the potential emergence of free Internet access to court records; the risk of handling the increased debt load; the risk of the transaction being challenged and disallowed by U.S. antitrust regulators; and the risk produced by the cultural differences between Thomson and West. The problem is that such assessments only address one side of the coin. In general, the risk associated with a new investment is considered a net incremental addition to the basic risk level of the company, and the incremental addition of risk is considered a net negative. Hence the immediate drop in stock price for most of the above examples at the time of the announcement. The implicit assumption is that the risk of doing nothing of continuing the status quo is low and stable. The logic seems to be that, since we are already doing what we are doing, it cant be terribly risky. This, unfortunately, is a very awed assumption. In the case of Thomson, the risk of not making the West acquisition was that of being left behind in the global race to become a scale player in the information services business. While it is conceivable that Thomson could have kept up with global rivals such as McGraw Hill, Reed Elsevier and Wolters Kluwer without this acquisition, keeping up was yet another source of risk at least as signicant as the combined integration, regulatory, cultural and nancial risks involved in buying West.
A Common Ailment A rampant underestimation of the perils of the status quo is something I have observed consistently over a career of attempting to foster change and innovation as a strategist. I have often been hired by management teams that were sufciently unhappy with the status quo to want to consider options for change. I would work dutifully with them to come up with alternative options to the status quo. We would then reverse-engineer each new alternative to determine what would have to be true for each alternative to be an
attractive option. What would have to be true about the customers, the market, the competitors, the cost structure, etc.? For example, if one option was to signicantly broaden the rms product line, we would have to believe, amongst other things, that 1) customers would welcome and reward a broader line, 2) the distribution channel would be willing to carry a broader line, and that 3) we could manufacture a broader line without our costs getting out of line with those of our competitors. Out of this list of important elements that would have to hold true for the option to be sound, we would identify the biggest risks i.e. the things that we were least certain would hold true. In this case, perhaps the most worrisome condition was that we would have to be able to produce a broader product line without our costs getting out of line due to the added complexity. I would then work with the team to analyze and model the condition of greatest concern to attempt to mitigate the risk associated with it. For example, how could we change our fundamental approach to manufacturing to deal cost-effectively with a broader product line? In the end, there were always risks associated with the proposed new options that could not be mitigated or wished away. The resulting phenomenon which I saw repeated over and over was that, having spent an intense amount of effort on understanding and marinating in the risks of the proposed new initiatives, the management team would come to view all of the options for change as too risky. They would choose to stick with the status quo despite the fact that the point of the entire exercise had been to improve from the unsatisfactory status quo. What I came to believe is that the only way to help management teams consider the risk of alternative options in the proper context was to insist that they take a further step and also reverseengineer the status quo. That is, determine what had to be true for the current strategy to be a sound option. When management teams reverse-engineered the status quo, they typically found it to be far from the risk-free scenario they had imagined. Rather, it was embedded with risks that were of similar or greater intensity to the risks of the alternative options. What happened next was interesting: many management teams would actually dismiss the status quo as too risky an option to consider. But this would only happen if they performed the reverse-engineering exercise, specifying what had to be true for the status quo to be optimal, and asking themselves whether those features were certain to be true. I would argue that Canadian capital markets participants need to engage in this very exercise whenever a company proposes mak-
ing a major investment aimed at transforming it from a largely Canadian company to a Canadian-based global company: they need to assess not only the risks of the new initiative itself, but also those of the status quo, and they need to do this with the same thoroughness, using the same standards. What they will nd, I predict, is that the status quo is much riskier than they largely by neglect ever imagined. By remaining national instead of going global, the company in question invites other competitors in the global arena to take the lead in building global scale and reaping the cost and quality advantages that global scale enables. The risk of irrelevance and either eventual takeover or destruction by global players is high. In far too many sectors automotive, branded pharmaceuticals, beverages, consumer packaged goods, consumer electronics, to name a few there are currently no Canadian companies of consequence. All have either been bought or blown out of their markets by competitors who had their eyes set on the global market. And even more sectors would have already been banished from the small list of winners were it not for regulatory protection. The bottom line is that the risk of turning a blind eye to global competition is not systematically lower than the risk of going global: they are just different forms of risk. Would Loblaws have been better served by an aggressive international growth strategy instead of focusing on defending its Canadian fortress against Wal-
Mart? If Falconbridge or Inco had moved sooner to expand internationally, would they have been immune from foreign takeover? In hindsight, the answers seem clear. While the capital markets may be satised with the acquisition of a Canadian company by a global player and the one-time benet investors receive from the acquirer paying a control premium for the takeover, the biggest payoff to investors lies in the building of a global company. Eschewing the risk of globalization simultaneously sacrifices the upside that comes with global consequence. The returns to investors of Manulife going from a substantially Canadian company to a global leader were huge as has been the case for Magna, Gildan, Couche-Tard and Thomson. The payoff for pursuing an aggressive strategy to be a player of international consequence is well illustrated by Canadian National Railway. When it emerged from the cloistered life of a Crown Corporation with its privatization in 1995, it embarked on an aggressive strategy to become a leading North American player. It benchmarked its costs against its major non-Canadian competitors and sought cost competitiveness, recognizing that in a free-trade world, its century-old east-west network had to be expanded aggressively to become north-south. This was accomplished via a series of U.S. acquisitions, and within a decade, its strategy for international competitiveness made it the fth-largest railway in North America and the third largest by market
The Myth of Canadas Hollowing-Out by James Milway

Much has been written of late about the hollowing out of corporate Canada. The rhetoric on the issue bypasses the question of whether corporate Canada actually is being hollowed out to get on to the more enjoyable topics of how bad the hollowing out is for Canada, and what we could do about it. At the Institute for Competitiveness and Prosperity, we decided to check on whether Canada was actually being hollowed out before we joined the discussion of what to do about this supposed problem. While there is no doubt that Canadianowned companies are being acquired by foreign rms, that is not tantamount to hollowing out. It is arguable that our most important companies are our Canadian-owned globally competitive companies. We dene these as Canadian rms that rank in the top ve of their industries worldwide in revenues earned in their industry globally. We did the research, and found that Canada had 72 such rms at the end of 2006 (see Figure 1 on p.8.). The hollowing-out argument would hold that we have many fewer such rms than we used to because we are being systematically hollowed out. To test that premise, we looked at the situation in 1985 to determine whether we had many more globally-competitive rms, and we found that the opposite is in fact true: we had fewer than half of the global leaders we have today only 33. And those rms were, on average, smaller in revenues, even measured in constant dollars. The truth is, we are not being hollowed out at all: we are growing globally-competitive firms faster than we are losing them. Having said that, in the past several years, a number of Canadian-owned rms have been acquired by foreign firms, including ATI, Falconbridge, Inco, Intrawest, Masonite and Zenon Environmental. The fact is that in the rough-and-tumble world of global business, good Canadian global rms will be acquired by even-bigger global players. What we need to do is make sure that we are producing just as many new globally competitive rms, as quickly as possible. The rethoric of hollowing out directs the argument to the wrong place to the protection of existing Canadian rms. The issue is the growth of new Canadian firms whose sights are set from the inception on the global market; firms like Research in Motion, Cognos and Husky Injection Molding. Accelerating the production of globally-competitive Canadian companies should be our prime focus, rather than the protection of the existing ones. We should be pleased with our progress in the past two decades, but must avoid complacency. I think we can all agree that Canada can never have too many global leaders.
James Milway is executive director of the Institute for Competitiveness and Prosperity, the research arm of Ontarios Task Force on Competitiveness, Prosperity and Economic Progress.
capitalization. In fact, it would have become the biggest had its proposed merger with second-biggest BNSF been allowed by the protectionist U.S. transportation authorities. Canadian Pacic Railway faced the same opportunities, minus the added challenge of transforming itself from a governmentowned entity. While it has expanded its network to take into account the North American realities and has become the sixthlargest railway on the continent, its network is a step-function below the third, fourth and fth players in size, at about 70 per cent of the size of Canadian Nationals. Its prot margin is only half that of CNs, because it has not aimed as high in cost effectiveness. As a consequence, CNs market capitalization stands at over US$24
billion, while CPs is under US$9 billion. Canadian capital market participants were obviously better served by Canadian Nationals goal of global signicance than by Canadian Pacics less-risky approach.
In closing Its been said that the only certainties in life are death and taxes, and to that I would add that the only certainty in modern business is that there is no escape from risk. The key is to recognize that the risks of globalizing vs. those of staying at home are two sides of the same coin: both entail risks that must be carefully considered. It is exceedingly unhelpful to Canadian rms for the capital markets to xate on the risks of globalizing while largely ignoring the risks of staying at home. In doing so, they avoid the consequences of failed efforts to globalize, while at the same time eliminating much of the upside that they could also enjoy through the successful globalization of Canadian rms. In discouraging such globalization, they are inadvertently threatening Canadas long-term prosperity in our increasingly interconnected world. It is high time for Canadas capital markets to take a closer look at the other side of the risk coin and bring more balance to their assessment of risk. When Canadian rms are insightful and courageous enough to go to bat on the global stage, its the very least that they can do.
Roger Martin is dean and professor of Strategic Management at the
Canadas 72 Global Leaders Today
Figure 1
Abitibi Consolidated Inc. Agrium Inc. Alcan Inc. Ashton-Potter ATCO Group Automation Tooling Systems Axcan Pharma Inc. Barrick Gold Corp. Bombardier Inc. CAE Cameco Corp. Canam Steel Canfor Corp. CCL Industries Inc. Celestica CHC Helicopter Corp. Chemtrade Logistics CGI Group Inc. Cinra Canadian National Railways Connors Bros. Income Fund Coolbrands International Cott Corp. Couche-Tard DALSA Corp. Finning International Fording Canadian Coal Trust Four Seasons Hotels and Resorts Gildan Activewear Inc. Harlequin Enterprises Inc. Husky Injection Molding IMA Exploration Inc. Jim Pattison Group Linamar Corp. MAAX Holdings Inc. MacDonald Dettwiler Corp.
Magellan Aerospace Corp. Magna International Inc. Major Drilling Group International Manulife Financial Marsulex Inc. McCain Foods Ltd. MDS Inc. Methanex Corp. Mitel North American Fur Auctions Nortel NOVA Chemicals Corp. Open Text Corp. Patheon Inc. Peerless Clothing Inc. Potash Corp. Quebecor World Research in Motion Ltd. Ritchie Bros. Auctioneers Scotia Mocatta ShawCor Ltd. Sierra Wireless SNC-Lavalin Spectra Premium Industries Sun Gro Horticulture TD Waterhouse/Ameritrade Teck Cominco Ltd. Tembec Inc. Thomson Corp. Timminco Ltd. TLCVision Tree Island Industries Trimac Group Wescast Industries Inc. Weston Foods Zarlink Semiconductor Inc.
Rotman School. He is also director of the Schools AIC Institute for Corporate Citizenship and chair of Ontarios Task Force on Competitiveness, Productivity and Economic Progress. His second book, on Integrative Thinking, will be published early in 2008.
Canadian Global Leaders in 1985
Figure 2
Abitibi-Price Alcan AMCA Asbestos Corporation Ltd. Atco Ltd. Bombardier Canada Malting CCL Industries Falconbridge Finning International Geac Computer Corp. Harlequin Hiram Walker HBC Fur Auction (now N. American Fur Auctions) Inco
Laidlaw Lumonics McCain Foods Ltd. Mitel Moore Corporation Ltd. National Business Systems Northern Telecom Scotts Hospitality Seagram Co. SNC Teck Cominco Ltd. Tembec Thomson Travel Timminco Trimac Trizec Unican Security Systems
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Even the best managers make persistent miscalculations when theyre making up their minds. Nobel Laureate in Economic Sciences Daniel Kahneman explains why.
Thought Leader Interview:
Daniel Kahneman
By Karen Christensen Optimism is mostly thought of as a positive concept, but you have found that it can be very damaging when it comes time to make risky decisions. Please explain. Optimism is one of the major biases in decision making. In general, its a wonderful thing to be optimistic: it keeps you healthy and resilient. But personally, I would not want my nancial advisor to be optimistic; Id like he or she to be as realistic as possible. Having said that, over-optimism is the engine of capitalism. When you look broadly at an economy, you want people to be taking risks. A few of them will succeed, and many will fail, because most of the people taking risks are not fully aware of their extent. But in the end, an economy with its fair share of risk takers is likely to fare better than one with fewer. Why are we so overly optimistic, and how can we ght this bias? Its human nature: most of us are highly optimistic most of the time. Research into human cognition traces this to many sources. One of the most powerful is the tendency of individuals to exaggerate their own talents to believe they are above average in their endowment of positive traits and abilities. Consider a survey of one million college students: when asked to rate themselves in comparison to their peers, 70 per cent said they were above average in leadership ability, while only two per cent rated themselves below average. When assessing their ability to get along with others, 60 per cent judged themselves to be in the top 10 per cent, and 25 per cent considered themselves to be in the top one per cent. People assign much higher probability to the truth of their opinions than is warranted. This is one of the reasons people trade so much in the market generally with bad results.
This natural inclination to exaggerate our talents is amplied by a tendency to misperceive the causes of events. The typical pattern of such attribution errors, as we psychologists call them, is for people to take credit for positive outcomes and to attribute negative outcomes to external factors, no matter what their true cause. For example, one study of letters to shareholders in annual reports found that executives tend to attribute favourable outcomes to factors under their control such as their corporate strategy or R&D programs; while unfavourable outcomes are more likely to be attributed to uncontrollable external factors such as ination, or weather.
Are you suggesting that business people exaggerate the degree of control they have over events? Yes. I am not the rst to say this: the writings of James March and Zur Shapira suggest that executives see risk as a challenge to be met by the exercise of skill, and that results are largely determined by their own actions and those of their organization. In their idealized self-image, they are not gamblers, but prudent and determined agents in control of both people and events. When it comes to making forecasts, they tend to ignore or downplay the possibility of random or uncontrollable occurrences that may impede their progress toward a goal. Studies that compare the actual outcomes of capital investment projects, mergers and acquisitions and market entries with managers original expectations for those ventures show a strong tendency towards over-optimism. For example, an analysis of startup ventures in a wide range of industries found that more than 80 per cent failed to achieve their market-share target, and these studies are backed up by observations of executives. Like other people,
business leaders routinely exaggerate their personal abilities, particularly for ambiguous, hard-to-measure traits like managerial skill. Their self-condence can lead them to assume that theyll be able to avoid or easily overcome potential problems in executing a project, and this is further exaggerated by a tendency to take personal credit for lucky breaks. Think of mergers and acquisitions, for instance. Mergers tend to come in waves, during periods of economic expansion. At such times, executives can over-attribute their companys strong performance to their own actions and abilities, rather than to the buoyant economy. Consequently, many M&A decisions may be the result of hubris, as the executives evaluating an acquisition candidate come to believe that, with proper planning and superior management skills, they could make it work. Studies of post-merger performance suggests that, on average, they are mistaken.
Most efforts to enter new markets are unsuccessful. Some would say that this is an unavoidable result of taking risks in uncertain situations. Agree or disagree? Everyone must agree that the occurrence of poor outcomes is an unavoidable result of risk-taking under uncertainty, and I assume that everyone would agree that improved decision making if it could be achieved would improve outcomes. When we look at the failures of entrepreneurial attempts, we see much evidence of what psychologists call the planning fallacy: decisions that are based on delusional optimism rather than on a rational assessment of the odds and of costs and benets. But of course, such a nding is statistically unavoidable: we do not see the outcomes of projects that were not undertaken, perhaps because of the absence of an optimistic bias. The overall frequency of failures is due to a complex mix of factors, including the general propensity for risk-taking, the quality of decision making, and of course, the prevailing conditions in the economy. Would managers be better off without concrete plans? Of course not that would be like rowing without a paddle. But it is useful to recognize that the very existence of a plan tends to induce overcondence. A plan is only a scenario, and almost by denition, it is optimistic. Any complex undertaking is subject to myriad problems from technology failures to shifts in exchange rates to bad weather and it is beyond the reach of the human imagination to foresee all of them at the outset. Although the probability of any one of these events could be low, the aggregate probability of something going awry can be high. As a result, scenario planning can lead to a serious underestimate of the risk of failure. How can managers improve the reliability of their forecasts? One approach that I recommend is introducing an objective forecasting method into the planning process that counteracts the personal and organizational sources of optimism. Dan Lovallo and I have called this taking an outside view. It involves thinking in terms of projects that are analogous to the one you are undertaking.
When youre doing something new, look for projects that are similar to yours, even if theyre not exactly the same, and try to determine how overly-optimistic the plans were in those projects. Did they come in above budget? How much longer did they take than planned? This can give you a pretty good idea of where you are likely to end up. Identifying the right reference class involves both art and science; you usually have to weigh similarities and differences on many variables and determine which are the most meaningful in judging how your own initiative will play out. Sometimes thats easy. If youre a studio executive trying to forecast sales for a new lm, youll formulate a reference class based on recent lms of the same genre, starring similar actors, with comparable budgets, etc. In other cases, its much trickier. But in general, we believe executives can gain a more accurate understanding of a projects likely outcome by supplementing traditional forecasting processes with a simple statistical analysis of analogous efforts.
Is risk-taking synonymous with courage? In many cases, what looks like risk-taking doesnt take courage at all; its just unrealistic optimism. Courage is a willingness to take the risk once you know the odds; optimistic overcondence means you are taking the risk because you dont know the odds. Theres a big difference. Describe the risky shift that takes place in groups. Groups tend to be even more optimistic than individuals, because doubts are suppressed in groups. Imagine the White House making decisions about what to do in Iraq. Its easy to imagine somebody in the administration thinking, This is a terrible idea, and its equally easy to understand how that person would suppress this thought. There is a strong human tendency and incentive to support the group, which leads to groups taking on more risk than individuals. Prospect Theory, which you developed with the late Amos Tversky, is credited with spawning the field of Behavioural Finance. Can you describe it in brief? Thats not easy to do, but I will try. Prospect Theory differs in several ways from Utility Theory, which is the prevalent theory of decision making in Economics. The main difference is that Utility Theory assumes perfect rationality, while Prospect Theory does not. One manifestation of the difference is in the representation of outcomes. For example, with nancial transactions, in standard economic theory people represent outcomes as states of wealth: how wealthy will I be if that investment comes through? Or how wealthy will I be if it fails? Within Prospect Theory, people consider outcomes as gains or losses, relative to where they are now. And psychologically speaking, this is much more realistic. Furthermore, a central assumption of Prospect Theory is that people treat gains and losses differently: they put more weight on losses than on gains. This is called loss aversion. Another important difference is that Prospect Theory recognizes the role of framing in decision making. For instance, people facing decisions over medical treatments will
In many cases, what looks like risk-taking doesnt take courage at all; its just unrealistic optimism.
respond differently to a 90 per cent survival rate than they do to a 10 per cent mortality rate, although the two are logically equivalent. These framing effects are difficult to reconcile with rational choice, which assumes that logically-identical choice problems lead to identical outcomes.
How does Prospect Theory affect decision making? It affects it in some major ways. When you think in terms of losses, because losses loom much larger than gains, you tend to be very risk averse. When you think in terms of wealth (as posited under Utility Theory), you tend to be much-less risk averse. Ill give you an example: suppose I offer you a gamble on the toss of a coin. If you guess right, you win $1,500; if you guess wrong, you lose $1,000. Practically no one wants to take this risk. Then I ask people to think of their wealth, and now think of two states of the world. In one, you have some wealth, call it W. In the other, you dont exactly know your wealth you believe it equally likely that you own (W - $1,000) or (W + $1,500). Which of these two states of the world is better? Most people now nd the second world more attractive than the rst. But of course, the second world is the one you choose to be in if you had accepted the gamble in the rst choice. This is a framing effect, and it illustrates the general observation that thinking in terms of wealth tends to make you less risk averse. Are people wrong to think this way? When you think in terms of states of wealth, you are thinking long term. So to the extent it is more rational and reasonable to think long term, then thats the calculation that people should make. Financial advisors try to get you to think in terms of your portfolio as a whole, your income post-retirement. In general, the more global you can be, the closer you will be both to rationality and to risk neutrality. One of your pet peeves is that business people dont put enough effort into learning from their mistakes. How should organizations deal with this? Organizations are out there every day, making tons of decisions, but they arent keeping track of them. There are many factors within organizations that make them reluctant to learn from experience, so its a forlorn hope, but the goal would be to have dispassionate evaluations of past decisions, and to spend some effort in guring out
why each decision did or did not pan out. Doing that systematically is key: really try to question the way you make decisions, and improve it. There is very little motivation within organizations to do this, because it threatens people. Executives dont like to be secondguessed, and procedures that are threatening to them are not likely to be adopted. But as a result, organizations are learning much less than they could from their experiences.
How has your perception of risk evolved since you began researching it? I am pleased to see that the view of risk is becoming less and less cognitive. Our innovation was that we identied some categories of risk that were the result of certain cognitive illusions and while that got lots of people excited, its only part of the picture. I recently read an academic paper titled, Risk as Feeling, and I really like that idea that the rst thing that happens is, youre afraid, and from your fear, you actually feel risk. With fear, probability doesnt matter much: emotion is dominated by the possibility of what might happen, and not so much by the probability. So the more emotional an event is, the less sensible people are. Its been said that your thinking inuences hundreds of billions of dollars in investments. How do you feel about that? Fortunately for me, I dont really believe that statement, so I feel no responsibility for the investments of others. I believe it is true that Behavioural Economics and Behavioural Finance have had some impact, but to date it is limited. There has been something of a behavioural fad, and during fads people tend to re-label what they are doing to t current opinions. Of course, I am not responsible for Behavioural Economics or Behavioral Finance: the work in those elds is done by professional economists, and I am a psychologist. But I will be pleased if the work we have done encourages individuals and organizations to be more reective about their decision making, and encourages policies that facilitate rational decisions.
Daniel Kahneman received the Nobel Prize in Economic Sciences in 2002 in recog-
nition of his lifelong work integrating psychological research and economic science. He is the Eugene Higgins Professor of Psychology and professor of Psychology and Public Affairs at the Woodrow Wilson School at Princeton University.
Countering the Biggest Risk of All
Chances are that your rm is insured and hedged against all sorts of risks, except for the greatest ones: the strategic risks that can disrupt or even destroy your business.
By Adrian Slywotzky and John Drzik The discipline of risk management has made considerable progress in recent years, with corporate treasurers and chief nancial ofcers becoming adept at quantifying and managing a wide range of risks, from currency uctuations, to chemical spills, to computer system failures. Firms defend themselves against these risks through now tried-and-true tools such as hedging, insurance and backup systems. More recently, some rms have been adopting the practice of enterprise risk management, which seeks to integrate available risk management techniques into a comprehensive, organizationwide approach. Many of these early adopters are at a rudimentary stage, in which they treat enterprise risk management as an extension of their audit or regulatory compliance processes. Others are at a more advanced stage, in which they quantify risks and link them to capital allocation and risk-transfer decisions. However, even among these more advanced practitioners, the focus of enterprise risk management rarely encompasses more than nancial, hazard and operational risks. Most organizations have not yet systematically addressed the risks that can be a much more serious cause of value destruction: strategic risks. The key to surviving strategic risks is knowing how to assess and respond to them. Many companies already commit themselves to meticulously managing even relatively small risks: for instance, auditing their invoices to comply with new corporate governance regulations. These rms can realize even greater value by taking a systematic approach to mitigating the strategic risks that can make or break them.
Following are seven major classes of strategic risks that organizations of all types need to take into account.
Strategic Risk #1: Industry Margin Squeeze As industries evolve, a succession of changes can unfold that threaten all companies in the sector. For example, it can become very costly to conduct R&D, as has happened in pharmaceuticals. The industry has experienced decreasing yield rates for new drugs, and companies are targeting more new therapies for chronic rather than acute diseases, which requires larger and longer clinical trials. An industry may go through rapid deregulation, like that experienced by airlines, which sharpens price competition among companies with high cost structures. Suppliers may gain power over their customers because of consolidation, which occurred among suppliers of at-panel displays, or because of the suppliers direct marketing to end users, which Intel did with its Intel Inside campaign. The industry may become subject to extreme business-cycle volatility, something experienced in telecommunications. Perhaps the greatest risk is that, because of a combination of these and other factors such as overcapacity and commoditization prot margins will be gradually destroyed for all players, and the entire industry will become a no-prot zone. The most effective countermeasure to a squeeze on margins is shifting the compete/ collaborate ratio among the relevant rms. When an industry is growing and margins are fat, companies can afford to compete on nearly all fronts and eschew collaboration; but this should rapidly shift when margins start to erode. Collaboration
can take many forms without violating antitrust laws, including the sharing of back-ofce functions, co-production or asset-sharing agreements, purchasing and supply chain coordination, or joint research and development. Most companies, though, fail to respond to changes in the economics of an industry quickly enough, and collaboration begins too late to make a difference. Witness the recent history of airlines, utilities, textile manufacturers, steel makers, music production companies and automakers. One notable exception to this too-little-too-late phenomenon is the Airbus consortium of European aircraft manufacturers, which played a critical role in helping its members regain market share and improve shrinking margins. Of course, this initiative involved government participation, but that shouldnt be allowed to cloud the issue. The dispute between the United States and the European Union over whether Airbus has received unfair government subsidies has tended to overshadow the tremendous efciencies the partnership has made possible.
Strategic Risk #2: Technology Shift Risks involving technology for example, the probability that a product will lose its patent protection or that a manufacturing process will become outdated can have a major effect on corporate performance. But when a new technology unexpectedly invades a marketplace, specic product and service offerings may
actually become obsolete in short order. Think, for example, of how digital imaging has shifted market share away from lm-based photography. Of course, you often dont know how and when a technology will win acceptance in the marketplace. Thats why risk-savvy managers faced with an unpredictable situation insure against technology risk by double bettingthat is, investing in two or more versions of a technology simultaneously so they can thrive no matter which version emerges as the winner. Betting on both the OS/2 and the Windows operating systems positioned Microsoft to be a winner, regardless of which one prevailed. Intels double bet on both RISC and CISC chip architectures improved the rms chances of succeeding in the semiconductor industry. By contrast, Motorolas failure to pursue both analog and digital cellular-phone technology opened the door for Nokia to supplant it as the industry leader. Of course, double betting often requires signicant short-term investments, so how you double bet is crucial. In the late 1990s, the Internets growth posed a classic double-bet problem for nancial services rms. Some, such as Bank One, invested large sums in building Internet banking channels, only to discover that very few of their customers wanted online-only service. Because these Web sites were poorly coordinated with the companies traditional service departments, customers werent able to easily move from one channel to another, and the banks investments were largely wasted.
Preventive Measures Companies face an array of strategic risks. Even the most serious, though, can be mitigated through the use of effective countermeasures.
STRATEGIC RISK Industry margin squeeze Technology shift Brand erosion One-of-a-kind competitor Customer priority shift New-project failure
COUNTERMEASURE Shift the compete/collaborate ratio. Double bet. Redene the scope of brand investment. Reallocate brand investment. Create a new, non-overlapping business design. Create and analyze propietary information. Conduct quick and cheap market experiments. Engage in smart sequencing. Develop excess options. Employ the stepping -stone method. Generate demand innovation.
Figure 1
Market stagnation
Contrast that with how discount brokerage rm Charles Schwab managed its Internet hedge. Schwab integrated its new eSchwab portal into its existing service network, giving investors the freedom to move from one channel to another from the Web to phones to personal visits with their brokers as they accessed account information and performed transactions. Subsequent market changes have challenged Schwabs business model, but during the 1990s the company was able to ride the wave of Internet-driven growth because it double bet on competing customer channels.
Strategic Risk #3: Brand Erosion Brands are subject to an array of risks that can sharply reduce their value. In some cases, risk can appear overnight and threaten the brand with outright collapse. When some Firestone tires were deemed defective, parent company Bridgestone suffered an 80 per cent drop in net income over one year. In other cases, the relevance and attractiveness of a brand may erode because of misdirected investment. Think of the gradual decline of GMs Saturn brand when, after a successful launch, the company failed to develop new models fast enough to satisfy customers. One of the most effective countermeasures to brand erosion is redening the scope of brand investment beyond marketing, taking into account other factors that affect a brand, such as service and product quality. Another effective countermeasure involves the continuous reallocation of brand investment based on early signs of weakness, identied through constant measurement of the key dimensions of the brand. This is how American Express averted the risk of brand erosion over the past decade. Amex came under competitive attack in the late 1980s from Visa and several major banks, which began to take market share from Amex worldwide by challenging consumer perceptions of the Amex brand. Visa, in its advertising, emphasized merchants wider acceptance of its card (and they dont take American Express), while the banks emphasized incentive programs that rewarded frequent usage. Amexs brand was becoming too narrowly focused and less relevant in customers eyes. So Amex made a series of investments, some of them unrelated to conventional marketing, to strengthen the brand. To increase the number of service establishments accepting its cards, Amex invested in its relationships with merchants reducing their transaction fees, speeding up payments, and increasing support for their advertising. Amex also invested heavily in its Membership Miles rewards program, paying more to participating airlines and expanding the program to include ve major hotel chains. This reallocation of investments arrested the brands slide early and contributed to dramatic growth in market value.
Strategic Risk #4: One-of-a-Kind Competitor Perhaps the most serious competitive risk is that a one-of-a-kind competitor will appear and seize the lions share of value in a market. It is vitally important to constantly scan the horizon to identify as early as possible the companies that, whether in your industry or not, could become such a rival. When youve identied one, the best response is a rapid change in business design that minimizes your strategic overlap with the unique competitor and allows you to establish a protable position in an adjacent economic space. Any retailer tracking the proliferation of Wal-Mart stores on a map of the United States during the 1980s and 1990s would have been able to predict precisely when this retailing tidal wave, driven by Wal-Marts unique business model, would wash through its home territory. Many major retail chains failed to do so. A handful, however, did respond in time, maintaining and growing their value by shifting their business designs to capture their own distinct slices of the market. Discount retailer Target identied the need to offer a unique product selection to compete with Wal-Marts. In response, it repositioned itself as a low-price but style-conscious retailer that appeals to a different customer set than Wal-Marts. Strategic Risk #5: Customer Priority Shift Many strategic risks involve customers, but perhaps the biggest is a shift in customer preferences. Two powerful countermeasures for managing this risk are the continuous creation and analysis of proprietary information that can detect the next phase of customer priorities, and fast and cheap experimentation, which helps managers quickly hone in on the right product variations to offer different customer micro-segments. These methods can help companies retain and grow their customer bases even as customers preferences evolve and, over time, increase overall protability. One company that has become procient in these methods is Coach, which makes high-quality leather goods. When Coach was spun off from Sara Lee in 2000, it trailed competitors Gucci and LVMH in revenue, protability and market capitalization. This was also a period of unanticipated growth and change at the sectors middle-market level, where purses, handbags, and briefcases sell, at retail, in the $200 to $400 range. Known for its conservative styling, Coach faced a high-risk situation as it tried to discern how long its existing customers would stick with the company if it ventured down the more trendy fashion paths that would allow it to expand its customer base. In the past few years, Coach has managed this risk well enough to surpass Gucci in revenue growth rate, prot margin, and market capitalization. Some of this success can be attributed to Coachs aggressive in-market testing of new products customer interRotman Magazine Spring 2007 / 17
People typically focus on the perils of risk and seek ways to minimize exposure to it. But the pursuit of growth requires companies to place bets on specic products, channels, customer segments and new business models.
views (more than 10,000 a year), in-store product tests, and market experiments that record the effect of changing such variables as price, features and offers by competing brands. Based on the proprietary information it gathers, Coach quickly alters product designs, drops items that test poorly, creates new lines in a wider range of fabrics and colours, changes prices, and tailors merchandise presentations to t customer demographics at specic stores. Although some of these efforts may seem excessive, the investment of time and money represents a low-cost form of insurance against getting blindsided by customers shifting priorities.
Strategic Risk #6: New-Project Failure Every new product or service faces the chance that it won't work technically, that it will fail to attract protable customers, that competitors will quickly copy it, or that its growth will be too slow or costly. The best protection against this risk begins with a clear-eyed assessment of a projects chances of success before it is launched. Once this evaluation is completed for example, by reviewing data on past company projects or by collecting external data on the success rate of similar projects three approaches can help a company systematically improve a projects odds: smart sequencing, which means undertaking the better-understood, more-controllable projects rst; developing excess options when planning a project in order to improve the chances of eventually picking the best one; and the stepping-stone method, which means creating a series of projects that lead from uncertainty to success. Project failures loom large in the automotive industry, where enormous investments are required to retool plants and develop worldwide marketing, sales, and maintenance programs around a new vehicle. Hence the signicance of Toyotas use of excess options in developing its gas-electric hybrid, the Prius. Toyotas process for creating the Prius was a seemingly wasteful one. As recounted by Jeffrey Liker in The Toyota W ay, the company overinvested in the Prius by generating a proliferation of design options and then sifting through them to nd the best ones. The Prius team simultaneously tested 20 different suspension systems
and examined 80 different hybrid engine technologies before focusing on four designs, each of which was then tested and rened in exhaustive detail. Toyota also took a stepping-stone approach to rolling out the vehicle, a method well-known in the software industry, in which version 1.0 is full of errors, version 2.0 shows great improvement, and version 3.0 is a market success. Version 1 of the Prius, launched in Japan in 1997, was good enough to appeal to a solid base of customers eager to try hybrid technology. Version 2, launched in 2002, featured improved styling, interior space, handling, and fuel economy, capturing 80 per cent of the world hybrid automobile market; version 3 was just as successful. Toyota now has a full suite of hybrid vehicles for sale that promise even better performance and commercial success for the company.
Strategic Risk #7: Market Stagnation Countless great companies have seen their market value plateau or decline as a result of their inability to nd new sources of growth. The most effective countermeasure to this is demand innovation [see Adrians article on this topic in our Winter 2004 issue], which involves redening your market by looking at it through the lens of the customers economics, and expanding the value you offer your customers beyond product functionality that is, helping your customers reduce their costs and improve their protability. During the past ten years, Air Liquide, a century-old supplier of industrial gases, was able to pursue demand innovation in a agging industry. The company, based in Paris, had always excelled at technical innovation. But by the late 1980s, its revenue and operating income were at, and technical innovation was leading nowhere, until the company redirected its innovation efforts to help improve customers systems economics. In the early 1990s, Air Liquide developed technology that allowed customers to establish small gas production facilities onsite rather than rely on large centralized plants and tanker shipments for their energy. One important side effect of this was the higher level of interaction between customers and the Air
Liquide staff: the on-site teams soon discovered that their industrial customers had a variety of pressing needs that Air Liquide might be able to address. Air Liquide gradually expanded from its core commodity gas business to offer a set of new services that included supply chain services and environmental consulting. By seizing these new opportunities, the company has expanded its potential markets, gained a greater share of its customers spending, and improved customer protability and loyalty.
The Upside of Risk People typically focus on the perils of risk, and the resulting managerial response is to seek ways to minimize exposure to it. But the pursuit of growth requires companies to take risks, to place bets on specic products, channels, customer segments and new business models. Strategic risk management, besides limiting the downside of risk, helps managers improve the odds of success behind those bets by forcing them to think more systematically about the future.
A new view of the relationship between risk and reward is thus emerging. While managers often see a trade-off between the two, creative risk management combined with a good business model can allow a company to improve in both areas. With the right mindset and timely deployment of countermeasures such as those described here, companies can manage the full spectrum of risks they face and nd that risk/reward sweet spot.
Adrian Slywotzky is a Boston-based managing
director of Mercer Management Consulting and co-author of How to Grow When Markets Dont (Warner Business Books, 2003). His new book on strategic risk, The Upside, will be published in ork-based May 2007 by Crown Business. John Drzik is the president of New Y Mercer Oliver Wyman, a global nancial services consulting rm This is an excerpt of an article that recently appeared in Harvard Business Review.
A Managers Guide to Strategic Risk
Figure 2
Step 4: Identify the potential upside for each risk. What could happen if a key risk is reversed? For example, while your company could lose big by not double betting as technology changes, making two well-placed bets could create significant growth opportunities. Step 5: Develop risk-mitigation action plans. For every major risk identied, there should be a team responsible for preparing a formal mitigation plan that outlines the risk assessments made in earlier steps and assigns responsibility for executing countermeasures. This team will often need to be multifunctional: a brand risk, for example, may need to be managed by representatives from marketing, customer service and manufacturing. Step 6: Adjust your capital decisions accordingly. After drawing up an explicit prole of the risks it faces, a company may want to change its capital calculations in two ways. First, business units that face greater levels of risk may warrant a higher cost of capital, one that's closer to venture-capital discount rates than typical corporate capital rates. Second, the company may need to change its capital structure depending on the way the risk level of the overall portfolio is changing over time. For instance, a company entering a period of greater volatility might need to become more conservative about capital, lowering its customary debt levels on its balance sheet or using joint ventures to spread the costs of a major new project.
Step 1: Identify and assess your risks. Consider the key risks you face in the seven main categories of strategic risk. For each type, consider: Severity: What percentage of your company's value could be affected by the risk? Consider previous analogous events in your industry or other industries, as well as factors specic to your business that could affect the risk's impact. Probability: What is the likelihood of the risk occurring? Consider previous cases of companies affected by this risk and external data about probability rates. Timing: Can you determine when the risk is likely to occur? Changing probability over time: Can you determine whether the likelihood of the risk is increasing, decreasing, or constant? Step 2: Map your risks. Having identied and assessed your main risks, map them so you can see your prole at a glance. Step 3: Quantify your risks. Risks should be comprehensively measured in a common currency. For instance, cash-ow-at-risk, earnings-at-risk, economic-capital-at risk or market-value-at-risk. Companies will then be able to compare and aggregate the risks and link them to decisions regarding capital allocation, pricing and risk transfer.
People tend to overestimate their own awareness and underestimate its bounds. As a result, they often overlook information that is crucial to making successful decisions.
By Dolly Chugh and Max Bazerman
Economists and psychologists rely on widely-divergent assumptions about human behaviour in constructing their theories. Economists tend to assume that people are fully rational, while psychologists particularly behavioural decision researchers identify the systematic ways in which people depart from rationality. While the two disciplines have offered different predictions of how individuals react to external stimuli, they share the implicit assumption that individuals will accurately perceive the stimuli available to them. Nobel Laureate in Economics Herbert Simon introduced bounded rationality as a behavioural model in which human rationality is very much bounded by the situation and by human computational powers. In this article, we propose that awareness can also be bounded, and that this occurs when people fail to see, seek, use or share highly relevant, easily-accessible and readilyperceivable information during the decision making process.
Following are three common types of bounded awareness.

1. Inattentional Blindness In a well-known study, cognitive psychologist Ulric Neisser presented a videotape of two visually-superimposed teams passing
basketballs, one wearing light-coloured shirts and the other wearing dark-coloured shirts, and asked participants to count the number of passes made between the two teams. Because the players were superimposed on top of each other, the task was moderately difcult. To score accurately, participants had to pay close attention to the task. Y et only 21 per cent of participants reported seeing a woman abruptly and clearly walk through the group of players carrying an open umbrella. A repeated viewing of the videotape, without the counting task, reveals that the woman is unambiguously visible in the middle of the screen for a signicant part of the video. We have used this video in our classrooms and have found that an even smaller percentage notices the woman. After the rst showing, during which students count passes, we ask whether anyone saw anything noteworthy. In a large class, it is common for just a few people to mention seeing a woman with an umbrella. Predictably, others scoff at the suggestion. Y et, when we show the video for the second time, everyone sees the woman, leading to signicant laughter and disbelief. This information sits visible and available in the visual eld, yet escapes awareness when competing with a task requiring other attentional resources. This phenomenon, known as inattentional blindness, has
BOUNDED AWARENESS OFTEN RESULTS WHEN DECISION MAKERS

AND GROUPS LIMIT THEIR ANALYSIS TO THE DATA AT HAND, RATHER THAN SEEKING OUT THE INFORMATION MOST RELEVANT TO THE QUESTION BEING CONSIDERED.
become an important area of study for cognitive and perceptual psychologists. Its consequences extend to real, life-and-death activities. For example, an airplane pilot who is attending to his controls could overlook the presence of another plane on his runway. Similarly, cell phones can divert drivers attention, making inattentional blindness a likely contributor to car accidents.
2. Change Blindness Change-detection researcher Daniel Simons of Carnegie-Mellon University has demonstrated that people fail to notice changes in the information that is visually available to them. Interestingly, they often cannot describe the change that has taken place, but do demonstrate traces of memory of what they saw before the change. For example, in one Simons study, an experimenter holding a basketball stopped pedestrians to ask for directions. While the pedestrian was giving directions, a group of people walked between the experimenter and the pedestrian. During this interruption, the experimenter handed the basketball to one person in the group. After giving directions, the pedestrian was asked if he or she noticed any sort of change during the brief exchange with the experimenter. Most did not. However, when led to think about a basketball, the pedestrian did recall seeing it at the beginning of the exchange, and some even recalled specic features of the ball. So, while the participants failed to explicitly notice that a change took place, they did hold accurate implicit memory representations of both the pre- and post-change image. The possible inuence of change blindness in decision making is evident in a study by Petter Johansson and his colleagues, in which participants were asked to choose the more attractive of two faces displayed on a computer screen. As participants moved the
cursor to indicate their choice, a ash on the screen distracted them, and the two pictures were reversed. Nonetheless, most subjects continued to move their cursor in the same direction, selecting the picture they originally viewed as the more attractive. Importantly, they both failed to notice the switch and provided reasons to support their unintended decision.
3. Focalism and the Focusing Illusion Focalism is the common tendency to focus too much on a particular event (the focal event) and too little on other events that are likely to occur concurrently. Timothy Wilson and Daniel Gilbert of the University of Virginia found that individuals overestimate the degree to which their future thoughts will be occupied by the focal event, as well as the duration of their emotional response to the event. For example, individuals overestimate the impact of positive events, such as the win of a preferred sports team or political candidate, on their overall happiness. And even more dramatically, individuals overestimate the impact of negative events, such as a major medical condition, on overall happiness. Using similar logic, David Schkade of UC San Diego and Nobel Laureate Daniel Kahneman of Princeton defined the focusing illusion as the human tendency to make judgments based on attention to only a subset of available information, to overweight that information, and to underweight unattended information. They had college students in the Midwest and southern California evaluate their own life satisfaction and the perceived life satisfaction of others. While Californians and Midwesterners reported similar levels of life satisfaction, both groups predicted that Californians had greater life satisfaction than Midwesterners. The factor that led to this pattern was that salient differences
between California and the Midwest, such as climate, heavily inuenced nonresidents judgments of residents life satisfaction. This study argued that when Californians imagined moving to the Midwest, and vice versa, weather became a salient factor, and all other life events affecting satisfaction were outside of awareness. But these factors played a much smaller role in determining the experienced life satisfaction of residents of either region. The implications of focalism are not limited to laboratory studies. The Challenger space shuttle tragedy, for example, can be better understood through this lens. On January 28, 1986, the Challenger was launched at the lowest temperature in its history, leading to a failure of the O-rings and an explosion that killed all seven astronauts aboard. Before the launch, the decision makers at NASA examined seven prior launches in which some sort of O-ring failure occurred. No clear pattern between O-rings and temperature emerged from this data, and the launch continued as scheduled. Critically, the decision makers failed to consider 17 previous launches in which no O-ring failure occurred. A logistic regression of all 24 launches would have led to an unambiguous conclusion: the Challenger had more than a 99 per cent chance of malfunction. The scientists at NASA, however well meaning, inadvertently caused a tragedy by missing information that was easily visible and accessible to them. More broadly, bounded awareness often results when decision makers and groups limit their analysis to the data at hand, rather than seeking out information most relevant to the question being considered.
Awareness in Decision Making While the information that is missed in each of the studies we have described is visual, and the mental processes at work appear to be perceptual, we believe that bounded awareness extends from perceptual processes to decision-making processes. A study by Harvards Daylian Cain and Carnegie-Mellons George Loewenstein and Don Moore describes the slippery slope of auditors becoming unethical. Essentially, it argues that auditors may be blind to changes made in corporate accounting practices as long as the changes are made slowly. Imagine that an accountant is in charge of the audit of a large corporation with a strong reputation. The auditor and client have an excellent relationship, and the auditor receives tens of millions of dollars in fees from the client each year. For three years, the accountant has viewed and approved the clients high-quality, extremely-ethical nancial statements. Suddenly, the corporation begins stretching, and even breaking, the law in certain areas. If the accountant were asked if she noticed these transgressions, would she sign a statement certifying that the financial statements were acceptable
according to government regulations? Now suppose that the auditor saw and approved of high-quality, highly-ethical nancial statements for one year, after which the corporation begins stretching the law in a few areas, but does not appear to break the law. In the third year, the rm stretches the ethicality of its returns a bit more. Some of the companys accounting decisions may now violate federal accounting standards. By the fourth year, the corporation has begun to stretch the law in many areas and occasionally, to break it. Auditors are much more likely to notice and refuse to sign the statements in the rst version than in the second version, even if the unethical behaviour is the same in year four of both stories. Astudy I [Prof. Bazerman] conducted with my Harvard colleague Francesca Gino showed that people are indeed less likely to perceive change if it occurs slowly over time rather then abruptly. In it we argued that recent business scandals such as the fall of Enron and Worldcom illustrate the boiling frog syndrome. According to this folk tale, if you place a frog in a pot of water and raise the temperature ever so slowly, the gradual warming will comfort the frog into a state of relaxation. Eventually, however, the frog will die due to his inability to sense the gradual increase in water temperature.
Awareness in Negotiations Two types of information are critical for any effective negotiator: the decisions of others and the rules of the game. However, due to bounded awareness, these types of information are often not seen or used by negotiators, leading to critical errors. Two types of negotiation problems illustrate the phenomenon: the Monty Hall problem, and the Acquiring a Company problem. 1. The Monty Hall problem In the 1960s, Monty Hall was the host of the American television game show Lets Make a Deal. On the show, Monty would ask contestants to pick one of three doors. He and the contestants knew that one of the doors led to the grand prize and that the other two doors led to zonks small prizes or gag gifts. After a contestant picked a door, Monty would often open one of the other two doors, reveal a zonk, and then offer the contestant the chance to trade their chosen door for the remaining unchosen and unopened door. Most contestants preferred to stick with their original door. Years after the show went off the air, statisticians and economists became intrigued with the analytical choice faced by the contestants. Their analysis argued that contestants erred by not switching to the remaining unchosen door. In addition, they argued against the common belief that, with only two doors remaining following the opening of one door by the host, the odds of winning the grand prize are 50-50.
The researchers proposed the following logic. When a contestant rst chose a door, she had a one-in-three chance of winning the prize. Lets assume that Monty always opened an unchosen door (the Monty Always Opens condition) and then offered the contestant the opportunity to switch. When Monty opened one door to reveal a zonk, as he always could do, the one-in-three probability did not change. In other words, the contestant still had a one-in-three chance of having picked the grand prize from the start, and a two-in-three chance that the grand prize was behind one of the other two, unchosen doors. After Monty opened one zonk door, the two-in-three chance was now carried by the unopened, unchosen door. Switching doors is the winning strategy, as it increases the participants odds of winning the grand prize from one to two-in-three. The critical assumption in this analysis was that Monty always opens an unchosen door. Adifferent assumption would be the Mean Monty condition, in which Monty knew where the grand prize was located and made decisions in order to minimize the contestants chances of winning. So, after the contestant picked a door, Mean Monty could either choose to end the game or open one door and offer a switch. Because Monty was actively trying to minimize the probability that the contestant would win the grand prize, the contestant should never have accepted an offer from Monty to switch. In fact, Montys choice to offer a switch should have served as a signal that the contestant had already picked the winning door. Thus, the winning strategy in the Monty always opens condition is to always switch doors, while the winning strategy in the Mean Monty condition is to never switch doors. Seeing the importance of Montys decision rule, and his likely decisions, is the key to the winning strategy. Bounded awareness can prevent individuals from seeing such readily-available information: in the Always Opens condition of the Monty Hall problem, most people (59 per cent) do not switch doors, essentially opting for a one-in-three chance of winning, rather than trading for a two-in-three chance. In the Mean Monty version, 79 per cent made the right decision to keep the existing door. Finally, the majority of participants made the same decision in both versions of the game; only 24 per cent answered both versions correctly. The key takeaway is that consistency across these two very different versions of the game demonstrates that the rules of the game and the decisions of others are outside of the bounds of awareness for most decision-makers.
2. The Acquiring a Company Problem In this problem, an acquiring rm has the opportunity to buy out a target rm. The acquiring rm does not know the exact current value of the target, only that it falls between $0 and $100 per share, with all
values equally likely. The target rm is expected to be worth 50 per cent more under the acquirers management than under the current ownership. Thus, it appears to make sense for a transaction to take place. The target rm can accept or reject the acquiring rms offer. Consider the logic that would lead to a rational response when considering whether to make an offer of $60 per share: If I offer $60 per share, the target will accept the offer 60 per cent of the time whenever the rm is worth between $0 and $60 to the target. Since all values between $0 and $60 are equally likely, the rm will, on average, be worth $30 per share to the acquirer, for a loss of $15 per share ($45 to $60). Thus, a $60 per share offer is unwise. Similar reasoning applies to any positive offer, such that, on average, the acquirer obtains a company worth 25 per cent less than the price it pays when its offer is accepted. If the target accepts the acquirers offer of $X, the company is currently worth anywhere from $0 and $X. As the problem is formulated, any value in that range is equally likely. Thus, the expected value of the offer equals $X/2. Because the company is worth 50 per cent more to the acquirer, the expected value to the acquirer is 1.5($X/2) = 0.75($X), just 75 per cent of its offer price. Thus, for any value of $X, the acquirers best option is to not make an offer ($0 per share). The paradox of the problem is that although the rm is always worth more to the acquirer than to the target, any offer higher than $0 generates a negative expected return to the acquirer. The paradox results from the high likelihood that the target will accept the acquirers offer when the rm is least valuable to the acquirer in other words, when it is a lemon. The Acquiring a Company problem demonstrates the winners curse, where one side, typically the seller, often has much better information than the other side, putting the buyer at a disadvantage. Astructural asymmetry is built into the problem: a rational buyer will bid $0 despite the fact that the buyers valuation of the company is higher than the sellers valuation. The strategic seller will not provide the buyer with information about the companys true value, especially when that value is low. As a result, to avoid an expected value loss, game theory recommends that buyers not make any offer. Extensive research on this problem suggests that bounded awareness leads decision makers to ignore or simplify the cognitions of opposing parties, as well as the rules of the game. Across studies, the modal response range falls between $50 and $75. The common reasoning is: On average, the rm will be worth $50 to the target and $75 to the acquirer; consequently, a transaction in this range will, on average, be protable to both parties. Typically, less that 10 per cent of participants offer $0 per share. Replications with accounting firm partners, CEOs, investment bankers, and many other skilled groups have produced similar results. Finally, even participants who were paid according to their
WE ARE NOT ADVOCATING AN UNREALISTIC STATE OF UNBOUNDEDNESS.

RATHER, WE PROPOSE THAT PEOPLE TEND TO DISBELIEVE THAT THEY HAVE OVERLOOKED INFORMATION CRUCIAL TO MAKING A SUCCESSFUL DECISION.
performance and given many opportunities to learn through experience exhibited the same pattern of responses. Most people can follow the logic that the optimal offer in this problem is $0 per share, yet when unaided, most people make a positive offer. Why? Because they systematically exclude information from their decision-making processes that they have the ability to include. They overlook the fact that their expected return depends on an acceptance by the other party, which in turn is affected by the rules of the game, which state that the other side knows its true value before accepting or rejecting the offer. This logic implies that acceptance by the target is most likely to occur when the acquirer is in the least-desirable position.
In closing Bounded awareness is the phenomenon whereby individuals do not see accessible and perceivable information during the decisionmaking process, while seeing other equally-accessible and perceivable information; as a result, useful information remains out-of-focus for the decision-maker. In work parallel to our own, the University of Chicagos Richard Thaler suggests that there are two additional ways in which decision making is limited: bounded willpower and bounded self-interest. The former describes the pervasive human tendency to give greater weight to present concerns than to future concerns, leading to inconsistencies between temporary motivations and longterm interests. The latter notes that our self-interest is bounded; unlike the stereotypic economic actor, we care about the outcomes of others. Similarly, in past work we have introduced the concept of bounded
ethicality to refer to the limits on our ethics of which we are not even aware. Together with bounded awareness, these concepts provide a specic roadmap of how human judgment departs from economic models and common intuition. We are not advocating an unrealistic state of unboundedness. Rather, we propose that people tend to overestimate their own awareness and underestimate its bounds. Subsequently, they disbelieve that they have overlooked information crucial to making a successful decision. The failure to recognize these normal psychological limitations poses an even greater danger than the limitation itself. That is, the risks of the meta error may exceed those of the error itself. We suspect that people tend to oversearch for information in lower-priority contexts and undersearch in higher priority contexts. The costs of bounded awareness are greatest, then, in contexts where the decisions are of the highest priority.
Dolly Chugh is an assistant professor of Management and Organizations at New Y ork Universitys Stern School of Business. Max Bazerman is the Jesse Isidor Straus Professor of Business Administration at Harvard Business School.
This is an excerpt of a paper that will appear in the June 2007 issue of Mind and Society. For a complete copy of the paper on which this article is based, e-mail christen@rotman.utoronto.ca
How Private Action
Can Reduce Public Vulnerability
An Interview with Erwann Michel-Kerjan by Karen Christensen
The director of Whartons Center for Risk and Decision Sciences explains why the private sector must take a leadership role in assuring a safer environment, and how our increasing interconnectedness breeds risk.
The world has faced a string of catastrophes in the early 21st century: 9/11, the Indian Ocean tsunami, and Hurricane Katrina, to name a few. Are these events somehow related? Yes, they are. We have not had a six-month period in the past few years without a major crisis that simultaneously affects several countries or industry sectors. If you look at the extreme events you mention from a distance, they seem quite different in terms of their nature, where they took place, and their impact on the world. But if you look closely, they actually share two common features: each was a major surprise and each led to large-scale destabilization or destruction. We know from experience that these two characteristics deeply affect decision making: the unexpected paralyzes us, and the large-scale disorients us. Within a few hours, it is no longer clear who has the power, resources, or even the legitimacy to act. The seriousness of these events demonstrates that the world has changed, and that we have entered a new era. For those of us who have been studying crises for years, this is a whole new ball game.
You have said that on many critical points relating to extremeevent preparedness, the conventional wisdom is wrong. How so? Many organizations and governments are still supporting their decisions and actions based upon risk and crisis management tools developed 20 years ago. Unfortunately, these tools are based on the outdated assumption that risks are mainly local and always formatted that it is possible to list all possible untoward events that could happen, determine their probability based on past experience, measure the costs and benets of specic mitigation measures, and implement them for each one of the risks. Surprise is not an option in these scenarios, and as a result, these organizations do not have the agility to move quickly to respond to surprises. This is not a sustainable posture. It is clear that the hallmarks of this new century include more and more unthinkable events, previouslyunseen contexts, and pressure for private companies and government authorities to react extremely quickly, even when they cannot predict the impact their actions will have. The bottom line is this: if your company still applies the old paradigm to this new era, it is wasting its resources. Risks are no longer local, but global, and one major feature of global risks is that no one single organization or country can face them alone. The world is now so interdependent that an action taken 5,000 miles away might affect you tomorrow. Conventional wisdom holds that one country or organization can have the capacity and expertise to manage catastrophic risks alone. In an increasingly global interdependent world, they have neither.
In the U.S., more than 80 per cent of shopping malls, ofce buildings, theaters, factories, energy installations and airlines are privately-owned. What are the implications of this for public safety? This is a critical point, and it relates to my previous answer regarding the globalization of risks. If 85 per cent of critical services for the day-to-day functioning of an area or a country are operated by private actors, it is very likely that 85 per cent of the expertise, know-how and resources are in private hands as well. It surprises me that the general debate remains focused on how governments can ensure public safety and security: it is high time to realize that governments will never succeed alone. Roles and responsibilities must be reversed, with the private sector taking a leadership position in assuring a safer environment, and the public sector making sure that private actors have enough incentives to do this properly. Weve all seen the devastating results of a lack of preparedness, but are there examples of private action that has successfully handled a public catastrophe? One fascinating example is the way Morgan Stanley faced the 9/11 attacks in New York City. Long before 9/11, resiliency in the face of major destabilizations was signaled at the highest levels as a priority action. Developing a national and international reaction capacity based on local expertise to handle the most destabilizing catastrophes became part of Morgan Stanleys internal culture. What they had learned in a series of rehearsal situations (Y2K, major disasters in Asia, etc.) was directly used on 9/11, even though the conguration was obviously quite different. They had hundreds of employees in the towers on that day, and almost all of them got out. In the aftermath, the company continued to thrive despite the loss of its World Trade Center headquarters. In short, many years of preparation and investment allowed them to develop a global reaction capacity against adversity. Top decision makers in companies that are serious about these emerging challenges cannot just rely on their risk managers. They need to recognize that what is at stake here is not risk management per se, but strategy. And that requires that these issues be placed on the agenda at the board level. The board is not only responsible for dening a global approach, but also for sending the appropriate signals to all levels within the organization that these questions are important and must be addressed adequately. There is mounting evidence that clients and shareholders are quite responsive to such enlightened corporate behaviour.
The race for global competitiveness calls for the development of ever-larger systems that entail even more potential risks. Would you advise business to put a cap on its quest for growth for the sake of public welfare? Not necessarily, but we have to recognize that in building ever-larger systems, we are increasing the potential losses associated with these systems failing, being destroyed or even manipulated. Indeed, 9/11 as well as the 2001 anthrax attacks demonstrated a new kind of vulnerability: terrorists have understood that they can signicantly increase the impact of their attacks by using our own infrastructures and vital networks (transportation, shipping, telecommunications, energy, cyberspace, etc.), and turning the diffusion capacity of these networks against us. When this is done, each element of a network becomes a potential weapon: every aircraft, every piece of mail, every train. As a result, our entire network can be considered contaminated. The resulting scale of this, combined with huge uncertainty, makes decision making a very delicate exercise. Talk a bit about the role of increasing global interdependence in our collective safety. Companies are facing the emergence of new economies and competitors that didnt even exist ve years ago. To remain competitive, they have to reach economies of scale and deliver their products and services as quickly as possible. Customers are living today in a just-in-time world: we buy something and we want it now. As a result, a growing globalization of social and economic activities has emerged, and a corollary is that our day-to-day activities are more dependent on one another. This is not totally new of course, but we have reached a degree of interdependence that no other society has experienced before us. And our children will live in an even more interdependent world. This has a tremendous impact on the way we address extreme events. Interdependencies create what economists call externalities: your actions will affect mine, and vice-versa. For instance, if Company A decides to invest heavily in protection measures, and Company B depends on A to build or ship a product, As investment benets B (positive externalities). But if Company A does not adequately protect its assets and operations, its failure has a negative impact on Company Bs business an example of negative externalities. Pollution is an example of negative externalities in the context of health and protection of the environment. The events of 9/11 have revealed the existence of what I would call negative security externalities, which do not require proximity: the attacks in New York City can be at least partially attributed to a lack of security at Logan Airport in Boston. My colleagues Howard Kunreuther and Geoffrey Heal have applied this notion in the case where the externalities also affect your own probability of failing. For example, what are the incentives for divisions of a
I believe that over the next decade, security will become a marketing argument.
rm to invest in protection against a catastrophic accident that could bankrupt the entire organization, if the other divisions they compete against internally are not doing it? Arthur Andersen, for instance, was sent into bankruptcy mainly by the actions of its Houston branch. If one division of a rm knows that the others are not investing in good risk management, it has less incentive to incur these costs.
You have said that the probability of another large-scale terrorist attack in North America is affected not only by the actions of governments, but also by each individual citizen. Can we really help ght terrorism? I believe individual customers have an important role to play, because they are a key driver of companies plans of action. I offer the following analogy between car safety 20 years ago and security today: when people talked about car safety 20 or 30 years ago, most customers did not integrate that into their purchasing decision, nor did car manufacturers use safety as a marketing argument. Today we see ads everywhere highlighting the safety elements of the vehicle (ve-star ratings, rst in the crash test in its category, etc). Safety has become part of the intrinsic value of a car, and this is reected in its price. I believe we will see a similar evolution in the coming decade, where security will become a marketing argument. This is even more likely to be true if the rhythm and scale of catastrophes continues to accelerate. Are you ready to pay more for a more secure product or service in the same way that you do for a safer car? If so, I predict more companies will see security as a competitive advantage, and integrate it into their business strategy. The economic impact of natural disasters continues to grow exponentially. Financial losses from such events grew from $22 billion in 1980 to $230 billion in 2005. Are we doomed to see these numbers continue to escalate? Denitely, for three reasons. First, because of increasing population in high-risk areas. In the 1950s, the worldwide population was approximately 2.5 billion, with approximately 30 per cent living in cities. Projections for 2025 show the population growing to more than eight billion, with about 60 per cent living in cities. As a result,
we have more and more mega-cities centres with more than 10 million inhabitants; by 2015 there will be 26 such cities in the world, most of them located in high risk areas for earthquakes and hurricanes. The second reason is increasing value-at-risk in these locations. People typically believe, it wont happen to me: for example, over 80 per cent of total insured value in the state of Florida is located directly on the coast today. If Hurricane Andrew, which hit Florida in 1992, occurred now, it would inict more than twice as much in insured losses than it did at that time. The third reason relates to the possible effects of global warming on sea-surface temperatures (which, when increased drastically, fuel the destructive power of hurricanes), combined with the possibility of a high hurricane cycle, i.e. more devastating hurricanes. When combined, these three factors do not offer a bright future if mitigation is not increased and we fail to regulate new construction in high risk areas. This question and more broadly, the role and responsibilities of the public and private sectors in providing adequate nancial protection to potential victims of natural disasters is central to much of the ongoing work in this eld by our Center. What is at stake here is the capacity of the U.S. and other exposed countries to develop effective catastrophe-nancing solutions to deal with the large-scale disasters occurring at an accelerated rhythm. Indeed, if you consider the 20 most costly insured catastrophes that have occurred in the world in the past 36 years (1970 to 2006; corrected for ination), 10 of them have occurred in just the past ve years, and nine have occurred in the U.S. Insured losses due to Hurricanes Katrina, Rita and Wilma in 2005 totaled nearly 60 billion dollars; that is about as much as insured losses due to all major natural disasters in the world between 1970 and 1985. Will 2007 and 2008 be even worse? And there is more to consider beyond natural disasters: a large pandemic similar to that of 1918 in Spain, a nuclear terrorist attack in one of the worlds busiest seaports, or a major disruption of Internet service could inict economic losses in the trillion-dollar range, leading to a worldwide recession.
How should business leaders go about preparing their organizations for such crises? The time has come to get creative. A rst step is to acknowledge that the challenges of large-scale risks have become vital strategy and policy issues for major stakeholders rms, governments, non-governmental organizations and the media. Then, the key might lie in the ability to imagine and act more collaboratively, as the 9/11 Commission report made very clear. One positive example is in the aftermath of the 2001 anthrax crisis which raised fundaRotman Magazine Spring 2007 / 29
mental questions about the security of postal services worldwide. My colleague Patrick Lagadec and I helped launch an international debrieng process to help postal operators manage this new era of emerging vulnerabilities. Our goal was to dene and test innovative collective action to address global-scale issues. Although initially undertaken for just a few postal services in Europe, executives rapidly stepped in from the U.S. and more than 25 other countries, as well as from international trade associations a valuable tipping effect. This initiative (Anthrax and Beyond) had quantiable results. For example, the creation of a global Web-based alert and information-sharing platform that passed its rst test in January 2003 the very day it became operational with a new anthrax alert in the Washington area. The initiative also reinforced trust, which is a crucial element when we collectively try to face the unknown. This was not work done by academics in some Ivory Tower, but concrete action enhanced by neutral expertise.
Could we extend this best practice to other sectors? Yes, quite easily. But it requires the courage and leadership of a critical mass of C-level decision makers in order to reach the tipping point effect I described, and an objective, neutral team to support the process. The few companies that took leadership on these issues a few years back are now sharing the benets of their actions. Crisis time is never a good time to exchange business cards. In recognition of how global risks are shaping the agendas of the worlds top decision makers, the World Economic Forum created the Global Risk Network. Describe your involvement in this initiative. The WEF recognized the need for an experienced-but-neutral catalyst to enhance international collaboration on these emerging challenges. In response, it launched the Global Risks Network, an inner circle made up of the WEF, several faculty members from Wharton, including myself, and senior executives from Citibank, Marsh McLennan, Merrill Lynch and Swiss Re (other companies might join in the coming weeks). A larger circle is made up of other top decision makers and experts who recognize that this new era we have entered calls for a new model, and they want to contribute to building that model. We have selected 23 core risks including climate change, energy supply interruptions and pandemics, as well as the ones weve mentioned here and we are monitoring them and their interdependencies over time. We also propose concrete solutions to tackle them: the Global Risks Report 2007 was published in January, a few days before the annual meeting in Davos [the report is available online at www.weforum.org/pdf/CSI/Global_Risks_2007.pdf]. In the end, global risks cannot, for the most part, be mitigated out of existence. But my message is this: experience proves that it is possible for businesses and governments to act upon them and be rewarded for their actions.
Corporate Crisis Predictions for 2007
The following questions were asked of Canadian CEOs and leaders of small, medium and large corporations and executives of the local and national Chambers of Commerce in December 2006:
1. What is the probability on a 100 point scale of the average public corporation in Canada experiencing a signicant crisis in 2007 in each of the following areas?
Bad product or service Fraud Bad PR/media Client lawsuit Espionage by competitor Employee violence Natural disaster Fire Terrorism
40 34 34 31 24 19 18 17 12
2. On a 7-point scale where 7 means very well prepared, how prepared is the average public corporation for each of these crises?
Fire Client lawsuit Bad product or service Fraud Bad PR/media Natural disaster Espionage by competitor Employee violence Terrorism
4.8 4.8 4.6 4.2 3.9 3.4 3.3 2.8 2.1
Source: CEO/Business Leader Poll by COMPAS in association with BDO Dunwoody for The Financial Post, January 2007
Erwann Michel-Kerjan is managing director of the Risk Management and Decision Processes Center at the Wharton School of Business. He is the author of Seeds of Disaster, Roots of Response: How Private Action Can Reduce Public Vulnerability (Cambridge University Press, 2006). In January, he was named one of the worlds top Y oung Global Leaders by the World Economic Forum, an honour bestowed annually upon exceptional leaders under 40.
By John Hull
Hulls Laws: What we can learn from derivatives mishaps
High-prole losses have made many nance professionals wary of derivatives, which is unfortunate, because they can provide a very efcient way to manage risk.
ver the last quarter century, some spectacular losses have resulted from the use of derivatives: Barings, Orange County and Long-Term Capital Management, to name a few. However, these losses should not be viewed as an indictment of the whole derivatives industry, as trades involving unacceptable risks represent only a tiny proportion of total trades, both in number and in value. Derivatives represent a vast multi-trillion-dollar market that, by most measures, has been extremely successful in enabling users to manage risk. To quote Alan Greenspan, The use of a growing array of derivatives and the related application of more sophisticated methods for measuring and managing risk are key factors underpinning the enhanced resilience of our largest nancial intermediaries. Nevertheless, it is worth considering the lessons we can learn from derivatives failures. The rst few apply to all investors. 1. Dene Risk Limits The rst and most important lesson from the spectacular losses alluded to above (and summarized in Figure One) concerns risk limits. It is essential that all companies nancial and non-nancial dene limits to the nancial risks that can be taken in a clear and unambiguous way. Ideally, overall risk limits should be set at the board level, and converted into limits that are applicable to the individuals responsible for managing particular risks, with procedures set up to ensure these limits are obeyed. For instance, daily reports should indicate the gain or loss that will be experienced for particular movements in market variables. These should be checked against the actual gains and losses that are experienced to ensure
that the valuation procedures underlying the reports are accurate. Because derivatives can be used for hedging, speculation or arbitrage, it is particularly important that companies monitor risks carefully when derivatives are used. Without close monitoring, it is impossible to know whether a derivatives trader has switched from being a hedger to a speculator, or from being an arbitrageur to a speculator. Barings is a classic example of what can go wrong here: Nick Leesons mandate was to carry out low-risk arbitrage between the Singapore and Osaka markets on Nikkei 225 futures. Unknown to his superiors in London, he switched from being an arbitrageur to taking huge bets on the future direction of the Nikkei 225. Systems within Barings were so inadequate that nobody knew what he was doing. I am not arguing that no risks should be taken: treasurers working for corporations, traders in financial institutions, and fund managers should be allowed to take positions on the future direction of relevant market variables. But the sizes of the positions that can be taken should be limited, and the systems in place should accurately report the risks being taken. Recent losses that would have been avoided by adequate risk controls include those at Allied Irish Bank and Amaranth (see Figure One.)
2. Take Risk Limits Seriously What happens if an individual exceeds the set risk limits and makes a prot? This is a tricky issue for senior management, because it is all-too tempting to ignore violations of risk limits when prots result. However, this is a shortsighted approach, and leads to a culture where risk limits are not taken seriously paving the way for disaster. The classic example here is the case of Orange County, California. Treasurer Robert Citrons activities between 1991 and 1993 had been highly protable for the municipality, which had come to rely on his trading for additional funding. As a result, people chose to ignore the risks he was taking. Unfortunately, the losses that occurred in 1994 ($2 billion) far exceeded the prots from previous years. The penalties for exceeding risk limits should be just as great when prots result as when losses result. Otherwise, traders that make losses are liable to keep increasing their bets in the hope that eventually a prot will result, and all will be forgiven. 3. Never Assume You Can Outguess the Market While it is true that some traders are better than others, no one gets it right all the time. A trader who correctly predicts the direction in which market variables will move 60 per cent of the time is doing well. If a trader has an outstanding track record (as Citron did in the early 1990s), it is likely to be a result of luck rather than superior trading skill. Suppose that a nancial institution employs 16 traders, and one of them makes prots in every quarter of a year. Should he receive a good bonus and have his risk limits increased? The answer to the rst part is that inevitably, the trader should (and will) receive a hefty bonus; but the answer to the second question should be no. The chance of making a prot in four consecutive quarters from random trading is 0.54, or 1 in 16. This means that just by chance, one of the 16 traders will get it right every single quarter of the year. We should
PHOTO: G. BISS/MASTERFILE
Big Losses by Financial Institutions
Figure 1
not assume that the traders luck will continue, and his or her risk limits should not increase.
4. Never Underestimate the Benets of Diversication When a trader appears to be good at predicting a particular market variable, there is a tendency to increase their limits. I have already argued that this is a bad idea. However, let us suppose that we are truly convinced that this trader has special talents. How undiversied should we allow ourselves to become in order to take advantage of this traders special skills? The answer is that the benets from diversication are huge, and it is unlikely that any trader is so good that it is worth foregoing these benets to speculate heavily on just one market variable. An example will illustrate the point here. Suppose that there are 20 stocks, each of which has an expected return of 10 per cent per annum and a standard deviation of returns of 30 per cent. The correlation between the returns from any two of the stocks is 0.2. By dividing an investment equally among the 20 stocks, an investor has an expected return of 10 per cent per annum and standard deviation of returns of 14.7 per cent. Diversification enables the investor to reduce risks by over half. Another way of expressing this is that diversication enables an investor to double the expected return per unit of risk taken. The investor would have to be extremely good at stock picking to get a better risk-return trade off by investing in just one stock. 5. Carry Out Scenario Analyses and Stress Tests The calculation of risk measures such as value at risk (VaR) should always be accompanied by scenario analyses and stress testing to obtain an understanding of what can go wrong. These techniques are very important, as people have an unfortunate tendency to anchor on one or two scenarios when evaluating decisions. In 1993 and 1994, for example, Procter & Gamble was so convinced that interest rates would remain low that it ignored the possibility of a 100-basis-point increase in its decision making. It is important to be creative in the way scenarios are generated. One approach is to look at 10 or 20 years of data and choose the most extreme events as scenarios. If there is a shortage of data on a key variable, it is sensible to choose a similar variable for which much more data is available and use historical daily percentage changes in that variable as a proxy for possible daily percentage changes in the key variable. For example, if there is little data on the prices of bonds issued by a particular country, we can look at historical data on prices of bonds issued by other similar countries to develop possible scenarios.
Allied Irish Bank This bank lost about $700 million from the speculative activities of one of its foreign exchange traders, John Rusnak, that lasted a number of years. Rusnak covered up his losses by creating ctitious option trades. Amaranth This hedge fund lost $6 billion when one of its Canadian traders made big bets on the future direction of natural gas prices. Barings This 200-year-old British bank was wiped out in 1995 by the activities of one trader, Nick Leeson, in Singapore. Leesons mandate was to arbitrage between Nikkei 225 futures quotes in Singapore and Osaka. Instead, he made big bets on the future direction of the Nikkei 225 using futures and options. The total loss was close to $1 billion. Hammersmith and Fulham This British local authority lost about $600 million on sterling interest rate swaps and options in 1988. All of its contracts were later declared null and void by the British courts, much to the annoyance of the banks on the other side of the transactions. Kidder Peabody The activities of a single trader, Joseph Jett, led to this New York investment dealer losing $350 million trading U.S. government securities and their strips (which are created when each of the cash ows underlying a bond is sold as a separate security.) The loss arose because of a mistake in the way the companys computer system calculated prots. Long-Term Capital Management This hedge fund lost about $4 billion in 1998. The strategy followed by the fund was convergence arbitrage: this involved attempting to identify two nearly-identical securities whose prices were temporarily out of line with each other. The company would buy the less expensive security and short the more expensive one, hedging any residual risks. In mid-1998 the company was badly hurt by widening credit spreads resulting from defaults on Russian bonds. The hedge fund was considered too large to fail; the New York Federal Reserve organized a $3.5 billion bailout by encouraging 14 banks to invest in the fund. National Westminster Bank This British bank lost about $130 million from using an inappropriate model to value swap options in 1997. Orange County The activities of the treasurer, Robert Citron, led to this Californian municipality losing about $2 billion in 1994. The treasurer used derivatives to speculate that interest rates would not rise. Procter & Gamble The treasury department of this large U.S. company lost about $90 million in 1994 trading highly-exotic interest rate derivatives contracts with Bankers Trust. It later sued Bankers Trust and settled out of court.
The next few lessons apply to nancial institutions: 1. Never blindly trust models Some of the large losses by nancial institutions occurred because of the models and computer systems being used. Kidder Peabody, for instance, was misled by its own systems, and National Westminster Bank had an incorrect model for valuing swap options that led to signicant losses. If large profits are reported when relatively-simple trading strategies are followed, there is a good chance that the models
underlying the calculation of the prots are wrong. Similarly, if a financial institution appears to be particularly competitive on its quotes for a particular type of deal, there is a good chance that it is using a different model from other market participants, and it should analyze what is going on carefully. To the head of a trading room, getting too much business of a certain type can be just as worrisome as getting too little business of that type.
The stories behind the losses emphasize the point that derivatives can be used for either hedging or speculation; that is, they can be used either to reduce risks or to take risks.
Enron provides another example of how overly-aggressive deal makers can cost their banks billions of dollars. One lesson from Enron is this: the fact that many banks are pushing hard to get a certain type of business should not be taken as an indication that the business will be ultimately protable. Businesses where high prots seem easy to achieve should be closely examined for potential operational, credit or market risks.
2. Be conservative in recognizing inception prots When a nancial institution sells a highly-exotic instrument to a non-nancial corporation, the valuation can be highly dependent on the underlying model. For example, instruments with longdated embedded interest-rate options can be highly dependent on the interest-rate model used. In these circumstances, a phrase used to describe the daily marking to market of the deal is marking to model. This is because there are no market prices for similar deals that can be used as a benchmark. Suppose that a nancial institution manages to sell an instrument to a client for $10 million more than it is worth, or at least $10 million more than its model says it is worth. The $10 million is known as an inception profit. When should it be recognized? There appears to be quite a variation in what different investment banks do. Some recognize the $10 million immediately whereas others are much more conservative and recognize it slowly over the life of the deal. Recognizing inception prots immediately is very dangerous. It encourages traders to use aggressive models, take their bonuses, and leave before the model and the value of the deal come under close scrutiny. It is much better to recognize inception prots slowly, so that traders have the motivation to investigate the impact of several different models and sets of assumptions before committing themselves to a deal. 3. Never sell clients inappropriate products It can be tempting to sell corporate clients inappropriate products, particularly when they appear to have an appetite for the underlying risks. But this is shortsighted. The most dramatic example of this is the activities of Bankers Trust (BT) in the period leading up to the spring of 1994. Many of BTs clients were persuaded to buy high-risk and totally inappropriate products. A typical product would give the client a good chance of saving a few basis points on its borrowings, and a small chance of costing a large amount of money. The products worked well for BTs clients in 1992 and 1993, but blew up in 1994 when interest rates rose sharply. The bad publicity that followed hurt BT greatly. The years it had spent building up trust among corporate clients and developing an enviable reputation for innovation in derivatives were largely lost as a result of the activities of a few overly-aggressive salespeople. BT was forced to pay large amounts to its clients to settle lawsuits out of court, and was taken over by Deutsche Bank in 1999.
4. Do not ignore liquidity risk Financial engineers usually base the pricing of exotic instruments and other instruments that trade relatively infrequently on the prices of actively-traded instruments. For example, nancial engineers: 1. often calculate a zero curve from actively-traded government bonds (known as on-the-run bonds) and uses it to price bonds that trade less frequently (off-the-run bonds); 2. often imply the volatility of an asset from actively-traded options and uses it to price less-actively traded options; and 3. often imply information about the behaviour of interest rates from actively-traded interest rate caps and swap options, and uses it to price products that are highly structured.
While these practices are not unreasonable, it is dangerous to assume that less-actively traded instruments can always be traded at close to their theoretical price. When nancial markets experience a shock of one sort or another, liquidity black holes may develop. Liquidity then becomes very important to investors, and illiquid instruments often sell at a big discount to their theoretical values. Trading strategies that assume large volumes of relatively illiquid instruments can be sold at short notice at close to their theoretical values are dangerous. An example of liquidity risk is provided by Long-Term Capital Management (LTCM). This hedge fund followed a strategy known as convergence arbitrage. It attempted to identify two securities (or portfolios of securities) that should in theory sell for the same price: if the market price of one security was less that of the other, it would buy that security and sell the other. The strategy was based on the idea that if two securities have the same theoretical price, their market prices should eventually be the same. In the summer of 1998, LTCM made a huge loss, largely because a default by Russia on its debt caused a ight to quality. LTCM tended to be long on illiquid instruments and short on the corresponding liquid instruments. For example, it was long on offthe-run bonds and short on on-the-run bonds. The spreads between the prices of illiquid instruments and the corresponding liquid instruments widened sharply after the Russian default. LTCM was highly leveraged. It experienced huge losses and there were margin calls on its positions that it was unable to meet. The LTCM story reinforces the importance of carrying out scenario analyses and stress testing to look at what can happen in
the worst of all worlds. LTCM could have tried to examine other times in history when there have been extreme ights to quality to quantify the liquidity risks it was facing.
5. When everyone is following the same trading strategy, beware It sometimes happens that many market participants are following essentially the same trading strategy. This creates a dangerous environment where there are liable to be big market moves, liquidity black holes, and large losses for the market participants. In the months leading up to the October 1987 market crash, increasing numbers of portfolio managers were attempting to insure their portfolios by creating synthetic put options. They bought stocks or stock index futures after a rise in the market, and sold them after a fall, which created an unstable market. A relatively small decline in stock prices could lead to a wave of selling by portfolio insurers. The latter would lead to a further decline in the market, which could give rise to another wave of selling, and so on. There is little doubt that without portfolio insurance, the crash of October 1987 would have been much less severe. A further example is provided by British insurance companies in the late 1990s. All insurance companies decided to hedge their exposure to a fall in long-term rates at about the same time. The result? A fall in long-term rates! The chief lesson to be learned from these stories is that it is important to see the big picture of what is going on in nancial markets, and to understand the risks inherent in situations where many market participants are following the same trading strategy.
In Closing The huge losses experienced from the use of derivatives have made many treasurers wary of them. Since the spate of mishaps in 1994 and 1995, some non-nancial corporations have announced plans to reduce or even eliminate their use of derivatives. This is unfortunate, because derivatives provide treasurers with very efcient ways to manage risks. The stories behind the losses emphasize the point that derivatives can be used for either hedging or speculation; that is, they can be used either to reduce risks or to take risks. Most losses occurred because derivatives were used inappropriately. Employees who had an implicit or explicit mandate to hedge their companys risks decided instead to speculate. The key lesson to be learned from the cautionary tales discussed here is the importance of internal controls. Senior management should issue a clear and unambiguous policy statement about how derivatives are to be used, and the extent to which it is permissible for employees to take positions on movements in market variables. Management should then institute controls to ensure that the policy is carried out. Giving individuals the authority to trade derivatives without closely monitoring the risks being taken is nothing short of a recipe for disaster.
John Hull is the Maple Financial Group Chair in Derivatives and
Risk Management and a professor of Finance at the Rotman School. His books include Options, Futures and other Derivatives (Pearson Prentice Hall, 2006), now in its sixth edition, and Risk Management and Financial Institutions (Pearson Prentice Hall, 2006), from which this article is a condensed excerpt.
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Presidents Corner
Michael Zerbs (MBA 89)
The president of the worlds leading provider of enterprise risk management solutions (and Rotman graduate) discusses the importance of an integrated approach to risk management, the recent acquisition of his rm, and the benets of Basel II.
Interview by Karen Christensen
You believe that risk management will soon become the main plank of institutions business and operating models, as well as a key source of value creation. Please explain. I see risk and reward emerging as the common yardstick by which all nancial products and activities can be compared. In the past, nancial institutions placed different risk categories and products in different silos: banks had bond desks, equity desks, and option desks; and people thought about market risk and credit risk, but they kept them very separate. As is always the case, when you bring things together, you begin to see the commonalities for example that some of these risks offset each other, and that they have some interplay. This in turn leads to the realization that you can create new products that combine market and credit risk, and that give
investors much more choice. The result is that there are new ways of allocating capital in a bank, so that youre not allocating just market capital or credit capital, youre allocating them together. This allows nancial institutions to essentially look at all the different activities they have, and break those activities out of their silos; and in a way, to refactor them and look at the underlying common denominators. This can lead to the creation of a whole new range of products that would have been impossible a few years earlier.
Algorithmics is known for taking an integrated approach to risk management. Please describe your approach. One of our key realizations is that you can always dene risks by using scenarios as a common language of risk and return. So what weve done is basically said, it doesnt really matter whether something is a market, credit or operational risk factor: you can dene a
Michael Zerbs is the president and chief operating ofcer of Algorithmics which was recognized as the global risk management leader in the 2006 Risk Technology Rankings, as voted by the readers of Risk magazine. In 2007, the company was once again recognized as one of Canadas Top 100 Employers in the annual Macleans magazine poll.
scenario where X would happen, and then look at various nancial products in terms of how they would behave under that scenario. The key aspect that denes each nancial product would be the amount of money you gain or lose under different scenarios. Its really secondary whether that scenario has a label that says, Im a market risk scenario or Im a credit risk scenario. So ours is a much more general approach to looking at risks, as opposed to calculating a market number here and a credit number there, and an operational risk number over there. At its core, its really about using scenarios as a common language to describe risk and return.
Basel II regulations are set to be implemented this year, and many believe they will have major impact on approaches to risk. What is your view of these regulations and how they will affect the nancial services industry? First of all, I believe Basel II is a signicant improvement over its earlier regulatory framework [Basel I], mostly because at its core is a view that capital should be risk-based, and the more risk a nancial institution has, the more capital it has to hold. In earlier approaches, the link between risk and capital was very loose and basic, mainly because 15 to 20 years ago [when Basel I was designed] the technology to measure risk simply didnt exist, so people had to make do with rough approximations. So fundamentally, Basel II a good thing. It is expensive to implement, but we are now seeing institutions at the forefront of implementation who have developed a very broad risk infrastructure in the process, and use it to run their business better. I therefore believe Basel II will have signicant business benets and will allow management to better understand where the risks are, and where the opportunities are. In the end, the expense of implementing Basel II will definitely pay off. What are the key day-to-day implications of Basel II for nancial services professionals? Basel II will enable dramatic improvements in a couple of areas as it enforces sound risk management practice in a banks daily opera38 / Rotman Magazine Spring 2007
tions. First, when traders (or credit or loan ofcers) make decisions on the front lines, their ability to make the right decision at the right time will be enhanced because they have better information available. In addition, senior management will be able to delegate more authority down the ranks, allowing people to exibly respond to customers. Overall, it will encourage the move from top-down managed organizations to rms that give decision-support tools to the people who have day-to-day contact with customers, allowing them to be much more exible. This shows how risk management can empower people on the front lines, leading to happier customers and increased prots. The key point here is that risk is becoming an essential part of every nancial decision that is made. Its not so much a discussion about whether thats a good thing or not people always believed it was a good thing. Rather, its a discussion of, is it technologically and economically possible to do it? And with Basel II, it has become possible.
Operational risk solutions [which are designed to assess the potential risks caused by failures by people, processes and IT systems] have lagged the other two types of risk management in many ways. In your view, why is this? The challenge with operational risk is that as the name implies it relates to the operations of the organization, which are all very different from one another. I mentioned earlier that scenarios are the common language for measuring risk; but operational risk is about much more than measuring risk. It relates to really understanding all of the business processes, and the control points along the path as decisions are taken; and these things are fairly unique to each organization. The risk management industry has been searching for a long time to dene the right standards for operational risk. What has happened under Basel II is that the regulators have indicated that under the advanced measurement approach, many possible solutions exist, and its up to each organization to gure out what is most appropriate for them, subject to certain minimum standards. This isnt necessarily a good outcome for the industry or for solution providers, because when there is no standard approach, it
actually slows down the development of new solutions because it is very risky to be rst, and to develop something on your own. At Algorithmics we believe that operational risk measurement is not just a software problem: its a software and consulting and advisory problem. Weve combined software solutions with advisory services where we actually help our clients nd the right measurement and the right management responses. And as a third component, we also provide content. By that I mean that whenever you measure something, you need to put it into a context. If I say your risk is 55 units, that tells you very little unless you know that yesterday your risk was 43 units, and your competitors was 100 units. So over the years, weve been gathering lots of data on external loss events, where organizations have experienced operational losses. And by using the data to provide benchmarks, we are implicitly creating a standard. So as a company and as an industry, we are making progress on operational risk; but because operations are so unique, it is denitely harder to arrive at a common standard than in other areas.
In the 18 years since you joined Algorithmics, the world has become a signicantly more risky place. What are some of the key changes youve observed? More than anything, it strikes me that the pace of innovation is really picking up. When I look at some of our larger clients say, the top four or ve nancial institutions in Canada, Germany or the UK they tell me that they are creating between 100 and 150 new structured products per year. Thats one or two every other business day. Five or ten years ago, when we helped our clients estimate risk, we were often looking at fairly standard portfolios of products exchange-trader products, bonds, equities; but now the proportion of structured products credit derivatives, CDOs, things like that is much higher, and the products are getting more advanced all the time. So the need for risk management creates a virtuous circle: the more technology that exists for risk measurement, the more innovative products come into being; and the more innovative products there are, the greater the need for more technology. Its really no different than what you see on your PC: each time you get a memory upgrade you feel great until you install the next version of your applications, and then you realize you need another memory upgrade. In nance, the same thing happens. Who do you consider your main competitor to be? Despite all of the accolades weve received over the years, its important to be quite humble and to watch what is going on in the space around us. Our biggest competitor continues to be internal development especially at the larger nancial institutions. They continue to look very carefully at whether or not a vendor truly has the specics right in order to implement a solution. We say to them, we will provide a framework for you, and all the components you need, but we will also work with you to adapt those components to your specic needs. By working with our clients, we implement a solution on top of the framework. So we watch closely to see what
the key pressure points are in internal development. Usually, the issue isnt so much the initial cost of an internal build vs. an external buy its the cost of maintenance. Because what inevitably happens is that, a higher and higher percentage of a nancial institutions IT group gets stuck in maintaining products rather than building new products. Understanding these dynamics is quite helpful. In terms of external competitors, Algorithmics really covers many areas of risk; we are in several market verticals for example, asset management, insurance, and we operate in many different regions. There is no other pure risk player that addresses all the areas as we do. Our competitors are strong in certain areas, but they dont have the breadth of solutions to cover all categories. SunGard would be one example of a very large company that does many things well, but only one of them is risk. Risk is all we do.
In January, 2005, Algorithmics was acquired by Fitch Group, the parent company of Fitch Ratings. What was the strategy behind this, and how has it affected your company? Its had a very positive effect on our ability to innovate and grow our business. Fitch approached Algorithmics because we have great products in a market that is destined for growth. They saw that what we need is to make a signicant investment in our products, our distribution capability, and our people. The latter investing in our people to meet the demands of our ongoing growth is our greatest operational challenge at the moment. Fitch was prepared to make these investments. From our perspective, we felt that Fitch would be a very good parent for us that would allow us to make the changes required to grow our business. And we have enjoyed significant growth since Fitch acquired us. In addition, as ratings becoming more quantitative and less qualitative as time goes by, Fitch is using Algorithmics intellectual property to power some of their more quantitatively-oriented business initiatives on the ratings side; they recently created a subsidiary called Derivative Fitch, which is focused on providing a wide range of information on CDOs and other credit products, and they are using some of our analytics to make the underlying risk assessments. So there is leverage of our IP in that way as well. What are the rst steps for a rm that wants to develop an integrated approach to risk management? Realizing what technology can do for you with respect to risk management is really important. But technology has become so powerful that when we use it for risk management or anything else we cannot just reapply the old way of thinking about our business and re-implement it in the same old way. We need to take a step back and ask some pretty fundamental questions, such as, what am I really trying to achieve here? In my experience, complex projects tend to go best when people ask such seemingly-simple but fundamental questions.
By David Robinson
Near Misses
A Primer on the of Risk and Unc

Plan
Strategy
Effective risk management depends on a clear understanding of what a rm can control and what factors are beyond its control. Using a combination of the techniques described here can go a long way to effective strategic planning in the face of risk.
The vast majority of todays business decisions are made with incomplete information and in the face of an uncertain future. Indeed, with the exception of a reasonable expectation that the sun will come up tomorrow, few things in human affairs can be predicted with certainty. The term risk management has come to serve as a set phrase in the nancial services industry, referring to a formal process for evaluating and controlling a companys total exposure to loss together with estimates of the probability of loss. However, this term deserves to be reclaimed to a broader usage, as all companies have to deal with risk. While risk can never be completely avoided, well-trained managers have many ways to take uncertainty into account in their strategy planning. Successful long-term planning includes a combination of the following seven techniques. 1. Risk Identication In most business situations it is remarkably easy to identify the risks that a rm is facing by simply asking, What could go wrong?
For example, if a product depends on components, the inability of a supplier to ship parts when needed is a risk that can be readily anticipated. Where a rm is attempting to develop a new technology, its research and development efforts will be successful in achieving desired performance or not. This is not to say that all risks can be foreseen. Former U.S. Defense Secretary Donald Rumsfeld famously observed that there are both known unknowns and unknown unknowns. In a military situation, he meant that an army might know that its adversary had troops over the horizon, but not exactly how many (a known unknown); and there might be some uncertainty as to whether the enemy had certain types of weapons (again, a known unknown). However, his dictum was meant to alert planners that, for all the variables that they could list and worry about, there would always be some others that could not have been anticipated (the unknown unknowns). It is hard to describe an unknown unknown in business, simply because it is just that unknown. However, an example would be
Control
e Management certainty.
Unknown Unknowns
something like the emergence of a completely new technology, such as the advent of transistors in electronics. The efciency and miniaturization offered by these solid-state devices could not have been predicted from the existing development work on thermionic valves. How can business leaders plan for the unknown unknown? At the extreme, they could calculate the cost of project abandonment due to unforeseen circumstances. It is usually possible to imagine the effects of an unknown unknown, even when a specic cause cannot be anticipated. For example, prior to 2001, the managers of the New York Stock Exchange would have had little reason to include terrorist attacks in their strategic planning. However, they could reasonably plan for something (an unknown unknown) that would make it impossible for them to use their own trading oor: burst water-pipes, bomb threats and catastrophic res in neighboring buildings were reasonably foreseeable as rare-but-possible events that could interrupt access to their building. One useful source of ideas for things that can go wrong is near misses. For example, in the loss of the Columbia space shuttle in 2003, the vehicle broke apart upon re-entry, a problem that had never been seen before. However, the cause of this disaster was damage to a heat-shielding tile that in turn was the result of a strike by fuel tank insulation that had broken away during the launch. The
loss of insulation had been observed before, and was a matter of ongoing concern for NASA engineers. In the business realm, the hint of a near miss comes when a successful tactical maneuver is accompanied by exclamations of, phew we were lucky! For example, suppose a rm runs an overly-generous mail-in coupon rebate program, but is saved from crippling expense by the lucky coincidence of a major storm that kept most shoppers out of the malls during the time of the promotion. This is a clue that in future, the rm could face a predictable loss if rebate programs are not more carefully planned and controlled.
2. Risk Assessment There are several ways to take risks into account and develop ways to manage them. The rst step is to consider when trend shifts and adverse events might occur, and then to make an assessment of the severity of the impact of these future states. Once risks have been identied, the impact of each can be assessed and assigned to one of three categories: noticeable, moderate and severe. Noticeable events are things such as the market entry of a small competitor with an offering that appeals to a market niche; the competitors eventual entry has been predicted, and as long as the competitor stays in its narrow market, there is a measurablebut-small loss in sales that requires no particular response. Events that have moderate impact might include the failure of a supplier in a market with many generic alternatives, or the entry of a competitor with equivalent technology. A catastrophic impact would be something that makes the current strategy infeasible, such as the
Approaches to risk management based on immediacy and impact

CATASTROPHIC
Figure 1
Plan an exit strategy
Abandon current strategy and develop a new one Shift signicant resources to counter Modest change in resource allocation
NOW
Manage with this in mind dont over-invest Pre-plan an appropriate reaction
MODERATE
Research strategy options
NOTICEABLE
Plan a possible resource shift

SOON
Develop metrics and monitor

FAR DISTANT
Effect Strategy
overturning of a patent or the emergence of a severe side effect to a drug as happened to Merck with the Vioxx painkiller. When these dimensions have been added to the list of risks, they can be organized into a matrix that gives general guidance for how to manage them, as shown in Figure 1. Consider rst the column of immediate-impact events. Few firms have to face a catastrophic event with little warning. Terrorist attacks and the outbreak of civil war certainly count in this category but thankfully, these are rare. Where there is a change in the environment that has an immediate impact that is moderate, the prudent managerial course of action is to quickly shift additional resources to the current strategy. For example, when a major competitor enters a rms principal market, a substantial investment in promotional spending (and a new advertising approach emphasizing either a defensible core position or direct comparison) is likely warranted. In the case of an immediate event that is assessed to have a merely noticeable impact, rms should continue with the strategy already in place and make only moderate adjustments. For example, suppose a niche-player enters a rms established market. The rm would continue the same level of promotional spending, but might retrain salespeople with new talking points to specically address the competition. The key to success here is in correctly assessing an impact as noticeable, but not over-reacting. Temporary promotional pricing by close competitors is an example of such a situation that should not require a complete rethinking of strategy. In the intermediate time horizon, where the risk to the rm is not imminent, the key success factor is to anticipate the risks to current strategy and then identify and monitor the relevant metrics. For example, it is often anticipated that a firms customers will migrate from one technology to another at some unknown point in the future. Prudent managers will handle this by surveying customer interest and monitoring the pricing of competing technology. For example, for many years manufacturers of cathode ray tube comput42 / Rotman Magazine Spring 2007
er monitors were well aware that at panel displays would eventually take over their business. However, early at panels were very expensive. There was no way to predict whether the change-over would be sudden (as happened with adoption of home use of the Internet) or would occur only as consumers replaced their computers (about once every four years). As long as careful observation is in place and managers are not complacent, a rm can take some time to develop alternate strategies. Where the intermediate future includes some possibly-catastrophic events, managers should test strategies against the cost of project abandonment. For example, in the tourism and hospitality industry, avian inuenza or other contagious diseases might close down all intercontinental travel for a period of time. The prudent course in the face of such a risk is to avoid over-investment that would bet the company on one project. When threats are far distant, the best approach is to have a comprehensive view of strategy planning and to fully explore all the options available. This is especially true in the middle case, where perceived adverse events are likely to have a moderate impact on the companys operations. Where the impact will be catastrophic, the rm should have an exit strategy in mind. Often this will simply be the abandonment of a specic market, with investment-to-date treated as a sunk cost. For far-distant threats that are likely to have only a minimal impact on the rm, identication of the relevant metrics such as market share or consumer sentiment and regular monitoring are all that is required.
3. Risk Tolerance and Diversication All rms and their management teams have a certain tolerance for risk, usually tied to the companys age, with young companies often willing to bet their entire net worth on a single strategy, while more mature rms may become positively risk averse. Between these two extremes, many rms actively manage their exposure to risk through a portfolio approach. Investors are familiar with the portfolio approach to investing, whereby they tolerate owning risky instruments by only putting a portion of their net worth into each one. A well-balanced portfolio is one with investments in many different industries, so that an adverse event that affects one investment will not impact the others. Firms use the same portfolio approach for projects, especially those associated with new product development. A simple product modication to adapt a product to an existing market is low risk, whereas entering a new industry with no developed market is very high risk. Under a portfolio approach, a rm would not completely avoid high-risk projects, but would limit the number of such projects that it undertakes simultaneously, balancing them with low-risk/moderate-reward projects. For example, a rm with too many high-risk projects might license out some patents to other rms to avoid the expenses and risks of new product introduction for some lines of business, while concentrating on the in-house launch of other ideas. 4. Risk Transfer When risk can be clearly identied, one way to eliminate it is to transfer it to another entity. For example, almost all homeowners transfer the risk of loss of their house by re to an insurance com-
pany. Similarly, commodity producers can transfer the risk of price declines by trading in the futures markets to lock in a price and commodity users can avoid price shocks by purchasing future contracts. Southwest Airlines used this technique to avoid a rise in jet fuel prices in 2005. Firms whose strategies are impacted by foreign currency exchange variations can reduce their risk by hedging transactions. Changes in ownership structure can also reduce risk. For example, a company that sells its headquarters building to a real-estate investor and then leases back the building transfers the risk of future value of the building to the investor. Taking on a joint venture partner can reduce a rms capital exposure to a risky new market. For example LG.Philips LCD is a a joint venture between South Koreas LG Electronics Inc. and Royal Philips Electronics NV of the Netherlands. It spreads the risk of loss from the massive investment needed to set up a at-panel TV manufacturing facility, when consumer adoption of the new technology was unknown. So why dont rms simply transfer away all their risk? First, there is no insurance or hedging that will protect against what is called ordinary business risk, such as the risk that consumers wont like a new product. Second, all insurance comes at a price. When Southwest hedged its fuel costs, JetBlue, an airline with a similar business model, guessed that fuel prices would decline and decided not to purchase future contracts. The rm that engages in sale-andlease back gives up the possibility of a capital return on the asset, and a rm that engages in a joint venture gives up part of future prots. In sum, risk transfer is never without cost.
6. Scenario Analysis In his seminal text Competitive Strategy, Michael Porter wrote: The device of scenarios is a particularly useful tool in emerging industries. Scenarios are discrete, internally-consistent views of how the world will look in the future. Scenario planning can be contrasted with forecasting, where careful analysis of historic data is used to offer a precise estimate of a parameter in the future, such as the specic level of demand for a rms product. Unfortunately, precise numeric estimates often give a false sense of certainty of what the future will be like. For example, the worldwide demand for domestic-use DVD recorders in 2005 was estimated at 47 million units, but in fact only about three million were sold. The difculty of extending trends into the future can also be illustrated with the example of the market opportunity that has opened up due to the increasing number of Americans who are obese. Furniture manufacturers and hospital equipment suppliers have adapted designs that accommodate people of high body weight. But will the trend continue? From 1980 to 2006, the number of obese Americans rose from 23 to 60 million people: but does that mean that we can expect an additional 37 million obese customers in the next 26 years, or will the trend reverse itself due to cultural shifts and new treatments for obesity? The process of constructing scenarios is fairly simple. First, identify the relevant variables, then identify whether they are discrete or continuous. Next, gather the variables together to make specic scenarios. Remember that Porter said that scenarios must
Steps in scenario planning
Figure 2
1. List the critical variables 2. Constrain continuous variables into low, medium and high values 3. Combine variables and eliminate implausible groupings 4. Give easy-to-remember names to each scenario 5. Estimate the likelihood of each scenario 6. Develop a concise but exhaustive list of possible strategies 7. Assess the likely payoff for each strategy against each scenario 8. Develop an algorithm to choose such as minimum acceptable payoff, maximum tolerable loss 9. Select a strategy and re-test it using regret analysis
be discrete and internally-consistent. That means that one scenario cannot overlap another, and ideally all possible futures can be described within the list of scenarios. The requirement for internal consistency may eliminate some scenarios entirely. For example, if the economy is in deep recession, its unlikely that consumer spending will be high. Coming up with a manageable, discreet set of scenarios is not as difcult as it sounds, because of likely links between variables. Consider the situation faced by film maker Kodak in the early 1990s. Effective digital camera technology had just been announced, and the uncertain future contained these possibilities:
(a) Digital cameras remain expensive and are only adopted in professional markets; (b) over a long period of time, digital cameras are adopted by professionals and a small number of serious amateurs, and the price of components remains high; (c) digital cameras move to the mainstream over several decades (similar to the adoption of automatic transmission in U.S. cars from 1940 to 1960) and prices of components gradually fall; (d) Grandma goes digital: fast and broad adoption of the digital format accompanied by a sharp decrease in use of film cameras and a lowering in component costs for digital cameras.
Note that while the cost of components for cameras was uncertain 15 years ago, it was reasonably predictable that with mass-market adoption would come manufacturing inefciencies resulting in lower prices. As a result the possibility: Everyone wants one and the prices go sky high, is not in the set of likely scenarios. Once the scenarios have been identied and labeled, it is prudent to make an estimate of the likelihood of each one. For discrete variables, when there is no credible external information, each outcome is equally likely. For example, the chance that a competitor will or will not decide to offer a product in a particular category should be estimated at 50 per cent. However, if the competitor has signaled intentions (We nd Asian markets particularly attractive for future growth), then the probability of market entry could be estimated higher, say 80 per cent. For continuous variables, such as growth of the economy, planners can use intuition or the average
value of published experts opinions (individual experts opinions are often wrong, and consensus of experts who listen to each others forecasts are not particularly reliable.) Fortunately, if scenario planning is done correctly, estimating which scenario is most likely is the least important part of the process. Rather, managers must try to choose a strategy that will be benecial no matter which scenario plays out.
7. Regret Analysis This essentially entails a re-check of the attractiveness of the chosen strategy. When a viable strategy has emerged, it should be considered a candidate for the rms planning, and managers should conduct one last survey of all the options that have been eliminated and reassess them to evaluate regret. Regret analysis is a form of protection against biases that tend to creep in when planners begin to believe with certainty the likelihood of one scenario. As an example, imagine a company that is considering selling software in the China. Amajor unknown about the future is whether the Chinese government will strictly enforce intellectual-property protection. A reasonable extrapolation from historic experience is that despite top government commitment to enforcement, there is still rampant piracy of computer software (more than 96 per cent of programs in use have been pirated). A thorough scenario analysis suggests that no strategy for market entry (high price, high price and economy versions, economy version only) can lead to any reasonable payoff for the foreseeable future.
However, what does regret analysis tell us? One scenario, though extremely unlikely, is that the future includes a fail-safe method to prevent the copying of software. Competitors who entered early have achieved brand recognition and our rms belated entry would be shut out of an emerging protable market. The level of regret would be high. After the regret analysis, the rm takes another look at the market entry strategies, and chooses the one with the best chance of establishing a recognized brand, albeit at little immediate incremental prot.
In Closing Effective decision making depends on managers clearly understanding what their rm can control and what factors are beyond its control. The systematic identication and assessment of risk, a frank discussion of risk tolerance, and the use of a variety of the techniques described here can go a long way to achieving effective strategic planning in the face of risk.
David Robinson teaches Marketing at the Haas School of Business, University of California, Berkeley, and has also taught at the Stanford Graduate School of Business. He writes a weekly business column for The San Francisco Chronicle. A longer version of this article is available on his Web site at http://faculty.haas.berkeley.edu/robinson
R E U N I O N 2 O O 7 M A Y 31
This year is a milestone for you a reunion year for you and your classmates. Milestone years include 1952, 1957, 1962, 1967, 1972, 1977, 1982, 1987, 1992, 1997, and 2002. F u l l - t i m e M B A , P a r t - t i m e M B A , EMBA s, GEMBA s or MMPAs, youre all included!) (F WHEN WHERE COST T h u r s d a y, M a y 3 1 , 2 0 0 7 Cocktails begin at 6:00 p.m. with Dinner at 8:00 p.m. Joseph L. Rotman School of Management, 105 St. Geor ge Str eet $135 per person. All taxes and gratuities included.
Hope to see you in May! For more information, including how to register or how to get involved with your class, please contact Michelle Zathureczky, manager volunteers and reunion coordinator, at michelle.zathureczky@rotman.utoronto.ca or 416.946.3665. Or visit our website at www.rotman.utoronto.ca/alumni/reunion.
S AV E T H E D A T E ! S T AY C O N N E C T E D !
Photos left to right: John Hryniuk, Waleed Qirbi (MBA 01)
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Dancing with Strangers: How Aspirations Affect a Firms Search for Partners
While maintaining ties with safe past partners stabilizes inter-organizational networks, non-local ties with strangers can sow the seeds of network change and innovation.
By Joel Baum, Timothy Rowley, Andrew Shipilov and You-Ta Chuang
own historical performance or social performance relative to their peers. Decision makers increase their emphasis on exploratory search and are more willing to engage in riskier behaviours with more uncertain outcomes (i.e., change markets, introduce new practices and processes, emphasize breakthrough innovations, launch products based on new technologies) when their performance differs from their goal or aspiration level. Partner-selection research and learning theory thus share a common emphasis on risk and uncertainty. In this article, we examine how an organizations performance affects its decision makers propensity to engage in non-local ties.
Uncertainty and Risk in Partner Selection Although partnerships between organizations can be a valuable source of competitive advantage, there is considerable risk and uncertainty associated with entering new partnerships. Prior to partnering, decision makers have imperfect information about potential partners capabilities and willingness to cooperate, raising search costs, uncertainty about partner motives, and the risk of exposure to opportunistic behaviour. To reduce search costs and alleviate the risks and uncertainties associated with partnerships, decision makers tend to create stable, preferential relationships characterized by trust and a rich information exchange with specic partners. Repeated ties between two organizations allow the partners to learn about each others competencies, priorities and reliability as employees invest in personal relationships that serve as conduits for information and uncertainty-reduction, and promote stability. Familiarity and mutual understanding in turn facilitate trust building and the development of cooperative norms of exchange based on the expectation of future interaction. Repeated ties also aid the development of a common language and routines that facilitate the joint planning, rich information exchange and conict resolution required for successful partnerships. Decision makers also reduce partnering uncertainty and risk by selecting their partners partners. Organizations tied to a common third party can obtain reliable information about each other from that partner. The frame of reference shifts, however, from direct contact and communication to indirect channels of information, reputation and referral. When two organizations share a common partner, it signals that both are regarded as trustworthy by the same organization. When rst-hand experience is not available, thirdparty endorsements offer significant savings in the time and resources needed to identify potential partners and build new relationships. Common ties also promote good behaviour by facilitating an information ow that enables collective monitoring and sanctioning of deviant behaviour among partners, which fosters a concern for local reputation.
Organizational decision makers tend to follow a logic of reducing uncertainty and risk in their exchange relationships by engaging past partners in repeated ties and forming new ties with partners partners based on referrals, rather than seeking riskier and more uncertain non-local ties beyond these bounds. As a result of this preference, organizational ties tend to congeal into dense, relatively stable, local clusters infused with information useful for reducing risk and uncertainty in future exchanges. We believe that the benets of non-local ties can, however, outweigh the greater risk and uncertainty they entail by connecting organizations to non-redundant contacts with unique information that their partners do not possess, and by creating opportunities to broker resource and information ows across unconnected partners. In contrast, over-reliance on embedded ties, which create redundant paths to the same information sources, can isolate organizations and harm their performance. The idea that organizations learn from their past performance, which conditions subsequent actions, has led to research on how organizational performance affects the likelihood of different types of action. One important nding is that decision makers actions differ depending on whether their organizations performance is above or below some goal or aspiration level relative to either their
Compared with relying on embedded ties, initiating non-local ties with more distant partners residing beyond their partners partners is risky and uncertain. Beyond this horizon of observability, all benets and protections afforded to embedded ties are lost, and possibilities for gaining information about and experience with potential partners capabilities, conduct and reliability are limited. Because of their greater risk and uncertainty and organizational decision makers reluctance to form them, non-local ties are relatively rare. Yet we have found that when organizations performance falls below aspirations, decision makers may be willing to bear the risk and uncertainty they entail in the hope of improving organizational performance.
Performance Aspirations Performance aspirations can arise from two types of comparisons. The rst is a comparison with the organizations own performance history. A rms recent performance history is a benchmark against which it evaluates its current performance trend. Its aspiration level adapts with a lag to past performance, rising when the organizations performance increases, and falling with performance downturns. The second is a social comparison with the performance of other comparable organizations. In this case, the recent performance of an organizations peer group is the benchmark against which decision makers evaluate their organizations current performance. Learning theory suggests that when performance is near aspiration levels, organizations tend to be risk-seeking when they are below their targets, and risk-averse when they are above targets. Because decision makers react more strongly to threats than opportunities, performance below aspiration levels is more likely to trigger risk taking. Performance slightly above aspiration levels reinforces lessons drawn from earlier experience, while unsatisfactory outcomes call existing practices and strategies into question. Performance far above aspirations, however, has an effect on risk taking similar to performance far below aspirations. Performance above aspirations can lead to experimentation and change because organizational success provides decision makers with access to additional or lower-cost resources, and instills self-condence in their abilities to pursue promising ideas previously deemed too risky. Greater risk taking may also occur in such circumstances because the downside of failure is mitigated by the large buffer between current performance and aspirations. Thus risk taking is a function of the gap between performance and aspirations, although with a steeper slope in the failure range, small failures loom larger than small successes. Our Study We recently examined the relationship between an organizations performance and its propensity for non-local ties using data on syndicate ties among investment banks in Canada between 1952
and 1990. Investment banks act as nancial intermediaries linking issuers (organizations) wishing to raise funds on capital markets to investors. They add value to corporations raising capital by effectively pricing and placing their issues. The industry is characterized as relationship-oriented, because banks commonly collaborate in underwriting deals and relationships are a vital resource, as ties are conduits to underwriting opportunities and contribute to banks reputations. Non-local syndicate ties are risky for investment banks, because partnerships, perhaps more than in other industries, are so central to their success and survival. Because individual banks often do not have access to the nancing needed to underwrite issues alone, they form partnerships with other investment banks with access to investors and the ability to effectively market the issue as a means of spreading risk. Choosing partners unable to create sufcient demand for an issue can be a costly mistake. In the short term, syndicate failures leave banks with the nancial burden of unsold portions of an issue and with partners that may be unable to reciprocate invitations to future deals. In the longer term, banks involved in failed offerings may nd it difcult to attract desirable syndicate partners for their future offerings and receive fewer attractive invitations to join others syndicates. They may also nd it hard to attract business from issuers, which carefully scrutinize the outcomes of similar public offerings. Thus, among the key benets sacriced in non-local syndicate ties is knowledge of partners marketing abilities, reliability and willingness to reciprocate invitations to and information about future deals. Nor can collective monitoring and sanctioning of deviant behaviour among local partners be counted on to secure reciprocity in non-local ties. Because banks potentially pay a high price for engaging ineffective partners, they should be particularly wary of unfamiliar non-local partners and rely heavily on engaging past partners within their circle of embedded ties. Nevertheless, we expected aspiration performance discrepancies to prompt banks decision makers to forego the benets and protections of embedded ties, and seek out non-local syndicate ties as a means of improving their performance. Timely access to diverse information regarding potential underwriting deals, other banks relationships and investor interests is a vital source of competitive advantage in investment banking. Building collaborations beyond embedded ties can enhance banks performance by connecting them to nonredundant contacts with unique information that their partners and partners partners do not have, creating opportunities to broker resource and information ows across unconnected partners. Non-local ties thus represent opportunities to experiment with new ideas or access novel, non-redundant information that can enhance organizational performance. Our analysis of the risk and uncertainty in Canadian investment banks portfolios of syndicate ties shows a clear sensitivity to historical and social performance feedback. Banks experiencing market share performance above and below historical and social aspirations engaged in a higher proportion of non-local syndicate ties, while those experiencing performance near market-share aspiration levels were more likely to reproduce their prior relationships. Additionally, banks with market-share performance above
Both the threat of social displacement by currently lower-performing peers and social striving to realize a more favourable market position can amplify risk taking.
helps to further specify processes by which network structures form and change. While embedded ties tend to stabilize inter-organizational networks, non-local ties plant the seeds of network change by affording outsiders opportunities to overcome the network entry barriers raised by embedded ties. Among Canadian investment banks, for example, non-local ties included many instances of established banks partnering with more recent entrants. For more established banks, these ties are particularly risky and uncertain; for entrants, however, they are a path into the core of the syndicate network. Because the conditions promoting the formation of non-local ties are fundamental to understanding network structure and dynamics, our ndings point to performance feedback processes as a powerful driver of network formation and change. Our findings also help to explain the frequently observed small-world characteristics of inter-organizational networks. Decision makers efforts to reduce risk and uncertainty engender dense, local clusters of embedded ties, while the non-local ties they form in response to aspiration performance gaps create channels for information exchange among the local clusters and fuse them into a network. Even a small fraction of non-local ties is sufcient to transform a locally-clustered network into a small world in which any two members have short connecting paths. Such network structures enable efcient access to the diverse information across regions of the network, while maintaining the benets of embedded ties within local clusters. Our analysis indicates that performance feedback directly affects the conditions under which decision makers will accept the risk and uncertainty associated with non-local ties, rather than relying on the relative safety and certainty of embedded ties. By specifying conditions under which organizations decision makers will tend to establish non-local ties, our performance feedback model helps to account for the evolution and structure of interorganizational networks, as well as predict which organizations will have the greatest propensity to play distinctive roles in the networks evolution.
social but below historical aspirations had a greater propensity for non-local ties. So, too, did banks experiencing market-share performance above historical but below social aspirations. These ndings suggest that both the threat of social displacement by currently lower-performing peers and social striving to realize a more favourable market position can amplify risk taking. Banks position in the industry status hierarchy also inuenced their partnering behaviour signicantly, although the results differed in one respect from those associated with more traditional performance metrics. Banks whose status ranking was below historical and social aspirations paralleled those for market share. The propensity of banks to form non-local ties was also greater for banks performing above their historical status aspirations, but there was no evidence to support the prediction that banks whose status was above their peers (here, other similarly sized banks) were more likely to engage in such risky and uncertain partnerships. The increased likelihood of partnering among organizations occupying similar status positions may account for this nding. Status homophily, which plays an inuential role in partnerships among investment banks, predicts that higher-status organizations will be reluctant to partner with those of lower status because such afliations can diminish their prestige, even though lower status organizations may be eager to increase their rank by partnering with those of higher status. High status relative to similar-size peers may thus limit a banks propensity to pursue non-local ties because the higher a banks status relative to its peers, the more likely non-local ties are to diminish its status relative to them. Our ndings also suggest, however, that this constraint is weaker for banks whose status is also below their own historical status aspiration level. Overall, our ndings indicate that banks decision makers are attentive to market share and status performance discrepancies, both historical and social, and that these discrepancies provoke them to rethink their inter-organizational relationships.
Conclusion Our study was motivated by the observation that research on inter-organizational partnering and performance feedback shares a common emphasis on uncertainty and risk. Beyond a better understanding of risk-taking in partner selection and the origins of non-local ties, our ndings also help us to better understand networks in terms of the processes that construct and shape them. The link between performance feedback and non-local ties
Joel Baum (MBA 85, PhD 89) is the Canadian National
Chair in Strategic Management and a professor of Strategic Management at the Rotman School. The founding editor of the journal Strategic Organization, he is also editor-in-chief of the annual series Advances in Strategic Management. Timothy Rowley is an associate professor of Strategic Management at the Rotman School. Andrew Shipilov (PhD 05) is an assistant professor of Strategic Management at INSEAD. You-Ta Chuang (PhD 05) is an assistant professor of Administrative Studies in York Universitys Atkinson Faculty of Liberal Arts and Professional Studies. For a complete copy of the Administrative Science Quarterly article from which this was excerpted, e-mail christen@rotman.utoronto.ca
hieving g Achievin Optimal Agreements

Focusing on promoting success rather than preventing failures is a powerful tool for achieving ones goals at the bargaining table.
By Geoffrey Leonardelli, Adam Galinsky, Gerardo Okhuysen and Thomas Mussweiler Successful negotiation involves carefully navigating conicting tendencies to compete and maximize self-interest, on one hand, and cooperating and maximizing joint interests, on the other. The mixed-motive setting of most bargaining situations can make negotiators feel torn between a drive to bargain hard and risk walking away from mutually-benecial agreements, or bargain soft and risk failing to claim as much of the resource as they could. To be most effective, negotiators must both create as large a pie as possible, to produce the most economically-efcient agreements, and
claim as much of that pie as possible, to satisfy their self-interest. An important question, then, is how can individuals navigate this conict to simultaneously compete and cooperate to achieve optimal agreements?
Regulatory Focus: Promotion vs. Prevention The tension between competition and cooperation connects to the larger and more fundamental challenge of how individuals regulate their thoughts, emotions, and behaviour. Regulatory Focus Theory was created to explain how people self-regulate toward desired end states. At the core of the theory is the notion that people are driven to approach pleasure and to avoid pain: sometimes
we are motivated more by the desire to secure pleasure, and other times by the desire to elude pain. Underneath these different ways to navigate the physical and social landscape are two fundamental concerns: nurturance and security. Nurturance needs activate and are best met through a promotion focus in which people tend to be concerned with accomplishments, hopes and aspirations. Promotion-focused individuals are directed toward achieving positive outcomes and attaining their ideals, and this focus is characterized by a general state of eagerness. By contrast, individuals with security concerns tend to adopt a prevention focus, a state of self-regulation concerned with safety, responsibilities and obligations. Such people focus on avoiding negative outcomes, and this focus is characterized by a general state of vigilance. Thus, promotion and prevention are distinct states and result in divergent strategic inclinations for achieving the desired end states of nurturance and security, respectively.
Regulatory focus can be conceived as both a chronic state and as a momentary product of the situation. The individual-difference approach recognizes that individuals differ in the extent to which they chronically focus on hopes and nurturance concerns, or on obligations and safety concerns. It has been suggested that these chronic states emerge from different patterns of parenting, with a promotion regulatory focus associated with withholding or withdrawing love, and a prevention regulatory focus associated with punishment as forms of parental discipline. Not only can regulatory focus be considered a chronic state, but certain situations make one regulatory focus predominant over the other. Because all individuals, regardless of their chronic focus, are capable of adopting either of the two approaches, each can be dominant at any one time. Situationally-induced regulatory focus can, for example, be brought on by asking people to think about their hopes and aspirations (promotion focus) or duties and obligations (prevention focus) or by task instructions that emphasize
One way that negotiators can resist the temptation to simply compromise is by focusing on their target prices and setting high aspirations.
either gains (promotion focus) or losses (prevention focus). A vast literature has accumulated showing the widespread effects of regulatory focus. Promotion-focused individuals are more open to change, generate more hypotheses, but make more errors of commission; they also experience cheerfulness after positive outcomes, and dejection after negative outcomes. Prevention-focused individuals, on the other hand, are xated on stability and on excluding erroneous hypotheses, tend to make errors of omission, and experience relief after positive outcomes, and agitation after negative outcomes. Despite the voluminous literature, little research has investigated how regulatory focus plays out in actual social situations. Even the studies that have touched on social interaction have generally not had participants engage in interpersonal interaction while under the inuence of one of the regulatory approaches. In a recent study, we sought to take Regulatory Focus Theory into a truly interactive context, a face-to-face negotiation, where individuals compete for scarce resources but also need to cooperate to meet their own needs and those of their negotiating partner. Specically, we sought to answer the question: which type of regulatory approach, promotion or prevention, will benet both the negotiator and the negotiating group? Before turning to this question, consider the factors that generally arm the negotiator with advantages at the bargaining table. Negotiation outcomes depend heavily on which goals and standards are made salient before and during the negotiation. The points a negotiator attends to within his or her bargaining position have profound effects on the resources a negotiator claims at the bargaining table. For example, a negotiator who concentrates on their most-preferred outcome (i.e. target price) will typically achieve a more advantageous outcome than the negotiator that concentrates on a minimally-acceptable settlement price. Another standard that inuences the negotiation process is the level of a rst, or opening, offer. One study found that the amount of the rst offer affects outcomes, with more extreme or aggressive rst offers leading to better outcomes for the person making that rst offer. In fact, initial offers tend to be better predictors of nal settlement prices than subsequent concessionary behaviour.
Across a number of different articles, negotiating contexts and experimental manipulations, the aggressiveness of the rst offer often explains more than 50 per cent of the variance in nal outcomes. There is a relationship between target prices and the aggressiveness of rst offers: negotiators xated on their target prices make more extreme rst offers. Focusing on target prices, setting aggressive goals, making the rst offer, and making aggressive rst offers have all been shown to lead negotiators to secure better agreements for themselves. In our research, we examined if one of the regulatory foci, promotion or prevention, can lead to these behaviours and, by extension, to these outcomes. By denition, the promotion regulatory focus is directed to achieving ideals, contemplating ones hopes and aspirations, and approaching positive outcomes. We predicted that the promotion regulatory focus will lead to more advantageous outcomes by increasing the attention of negotiators to target prices and by leading to more extreme opening offers. A promotion regulatory focus should provide the negotiator with an advantage at the bargaining table. Our rst two studies investigated whether a promotion focus gives a negotiator a bargaining advantage. In these studies, we used a single-issue negotiation, typically called a distributive negotiation, because the two negotiators are only competing over the distribution of the resources from this one issue.
Integrative Negotiations A promotion regulatory focus also may have advantages for the negotiating group that go beyond those provided for individual negotiators. Such a situation could occur in negotiations that involve multiple issues. In many multiple-issue negotiations, both negotiators are unlikely to prioritize the issues in the same order. As a result, both negotiators can improve their outcomes by conceding on low priority issues in exchange for their most preferred outcome on high priority issues a technique called logrolling. Multiple-issue negotiations are often called integrative negotiations because people can integrate their conicting priorities to achieve the most efcient outcome that expands the pie. To the extent that negotiators are able to integrate their conicting priorities, an agreement is said to be more efcient. An agreement is considered to be maximally efcient if there are no possible agreements that would improve the utility of one or both parties without hurting either party. Mere compromise, or simply splitting all issues down the middle, is an impediment to reaching efcient agreements; instead, negotiators should use the logrolling technique. We contend that one way that negotiators can resist the temptation to simply compromise is by focusing on their target prices and setting high aspirations. Knowing what one wants should allow the negotiator to achieve the best possible outcomes on high priority issues in exchange for concession on low priority ones. A promotion focus, relative to a prevention focus, may yield a greater likelihood of reaching a mutually benecial outcome because individuals will probe more aggressively for opportunities to achieve their aspirations. Across three studies, we found that a promotion regulatory focus led to superior negotiation outcomes compared to a preven-
tion regulatory focus. Study 1 tested the hypothesis that greater promotion focus leads to better outcomes in a distributive negotiation. To test this, participants engaged in a job negotiation concerning a signing bonus. Prior to the negotiation, we measured the regulatory focus of participants who played the role of the recruiter, whose goal was to pay the lowest possible bonus to the candidate. We used a continuous measure of regulatory focus, with higher numbers indicating more promotion focus. We predicted that the more the recruiter reported approaching negotiations with a promotion focus, the lower the nal bonus would be in this negotiation. The study demonstrated that in a single-issue negotiation, a promotion regulatory focus is associated with a distributive advantage. The more recruiters in a simulated hiring negotiation focused on achieving positive outcomes, the more they were able to minimize their own costs by agreeing to pay a lower bonus to the candidate. Study 2 extended these ndings by using an experimental design in which regulatory focus was manipulated rather than measured. Participants engaged in a negotiation over the sale of a pharmaceutical plant. We experimentally manipulated the buyers regulatory focus. Buyers primed with a promotion regulatory focus were expected to pay more attention to their target prices and to minimize their cost by agreeing to a lower sales price for the plant (a better outcome for them) than buyers primed with a prevention regulatory focus. Consistent with the results of the rst study, negotiators in a promotion regulatory focus were more successful in a distributive negotiation than were those in a prevention regulatory focus. In addition, this study examined the extent to which a promotion focus produces more extreme or aggressive opening offers and whether the aggressiveness of opening offers might account for why a promotion focus yields better outcomes than a prevention focus. Focus on target price has been shown to lead to more extreme opening offers. Individuals with a promotion focus may be more likely to make aggressive opening offers as a way to achieve their aspirations; that is, extreme offers may represent a strategy particularly suited for achieving promotion goals. Such offers introduce a powerful anchor to the subsequent negotiation process to which the nal agreement is tied. This suggests that the effect of promotion focus in negotiations is partially produced via the effect of anchors. In fact, anchoring effects are so robust that neither expertise nor incentives, nor explicit warnings, nor time wards against their inuence. Once a negotiator with a promotion focus has started with an extreme and advantageous initial offer, it may be very difcult for the other side to undo the effects of this powerful anchor. Study 3 examined the role of regulatory focus in a multi-issue negotiation, one that contained integrative possibilities. This study demonstrated that everyone in the negotiations beneted from the focus on promotion. Furthermore, this promotion advantage was independent of the value of the negotiated outcome. Regardless of whether parties negotiated over benets (dividing the spoils of a recently awarded government contract) or burdens (dividing the costs of a government mandated fine) they were more likely to obtain an outcome that benefited both parties than when they were in a promotion rather than prevention regulatory focus.
The Question of Interaction Fit Because prevention-focused individuals appear to be sensitive to the possibility of rejection, a prevention regulatory focus could lead to greater perspective-taking, a sense of connectedness, and consideration of the other persons goals. Some research supports this idea, by showing that individuals from more group-based cultures (such as those from many East Asian nations) are more likely to take a prevention focus. Although at rst glance this research could suggest that prevention-focused individuals should be better able to achieve more mutually-benecial outcomes, the combination of this research and Study 3 suggest that mutually-benecial results depend on individuals also being concerned with achieving their own optimal outcomes. Interaction t concerns whether two interacting individuals need to be in the same regulatory focus to increase social coordination and positive interpersonal consequences. This question relates to research concerning whether behaviour mimicry or complementarity is the surest route to smooth interactions. Research on mimicry has shown that engaging in motor mimicry leads to smoother interactions and increases liking between interaction partners, and that motor mimicry is most likely to be used in an unconscious manner when an individual has an afliation goal. In contrast, in hierarchical relationships (i.e., where one individual has a higher status than the other), complementarity behaviours (e.g., having a constricted posture when ones interaction partner has an expansive posture) can lead to more comfortable interactions. In closing Our ndings not only demonstrate the negotiation benets of promotion regulatory focus but also hint at the mechanisms that may be responsible for this advantage. Across both of the rst two studies, promotion-focused negotiators paid greater attention to their target prices than did prevention-focused negotiators. Attending to target prices not only leads negotiators to strive and achieve their goals, and thereby accrue more advantageous distributive outcomes, but it also prevents them from simply settling for minimally acceptable outcomes and compromises; in trying to maximize outcomes, a promotion regulatory focus leads negotiators to discover mutually benecial trade-offs and achieve solutions optimal for both parties. By examining the consequences of regulatory focus for interpersonal contexts, the current research provides a new direction for regulatory focus, and offers the promise of new insights into its dynamics, and the nature of negotiations and social interaction.
Geoffrey J. Leonardelli is assistant professor of Organizational Behaviour at the Rotman School of Management. Adam Galinsky is an associate professor of Management and Organizations Northwestern Universitys Kellogg School of Management. Gerardo Okhuysen is associate professor of Management at the University of Utahs David Eccles School of Business. Thomas Mussweiler is a professor of Social Psychology at the University of Cologne.
Embracing Risk to Learn, Growand Innovate

by Diego Rodriguez and Ryan Jacoby Its easy and seductive to say that entrepreneurial business people always forge ahead, risk be damned. However, the glamour of bold action is often stymied by the specter of risk. New offerings may succeed in the market, but more often, they fail. Competitors may outwit you. Careers may hang in the balance.Taking bold risks does not feel safe. But to seek out zero risk is to commit to doing nothing. How does one move ahead and create growth in such an environment? There is a better way. We applied the design process to this challenge, and set out to understand how designers approach risk. What we found is very encouraging. In the world of design thinking, acknowledging risk is the rst step toward taking action, and with action comes insight, evidence, and real options. To increase their odds of innovating routinely and successfully, todays organizations need to learn to live with risk the way designers do.
As an innovator, youve likely encountered some of the most challenging and risky problems in the world of business. Lets grow this lagging brand. Lets envision the future of our market. Lets connect to a whole new set of users and customers. When it comes to generating business growth by bringing new things into the world, the stakes are high, and risk is everywhere.
The Designers Approach to Risk Risk, in the traditional business sense, is an assessment of the downside that might result from taking a particular action. If the perceived level of risk is too high, people working within a business-as-usual paradigm look for a less-risky alternative, or even forego action altogether. Weve found that this traditional, negative denition doesnt exist in the lexicon of most designers. For them, risk isnt a measure of the downside; instead, it is a measure of upside and opportunity. If the risk isnt great enough, designers might well ask themselves, why bother?
People who employ design thinking know that amplifying risk is a way to create more evidence of what works and what doesnt.
Insight #1: Designers dont seek to mitigate risk. They embrace it, even amplify it. Y oda was wrong. When it comes to working with risk, trying is as important as doing. Consider what Owen Rogers, a designer who has worked at IDEO for over a decade, told us. Speaking to a set of experiences gleaned from hundreds of client engagements, he summed up how designers approach risk: For a designer, trying is more coveted than success. The real risk isnt failing, it is not trying. Trying is a statement of optimism, and a person, a team, or even an entire company grows more by acting than by standing still. In the worldview of a design thinker, failure is the best way to clear the fog to see a path to success. With its diminutive wheels and bug eyes, the rst generation Toyota Prius looked odd, and its performance was nothing to write home about. Competitors said it couldnt possibly be protable. A failure? By conventional standards, yes. But if we had taken Toyotas view, we would have seen it not as a failure, but as an experience absolutely necessary to creating the second-generation model, which is by all accounts a remarkable success. Designers see risk not as something static, but as a dynamic element, as yet another design variable. Amplifying risk is a way to increase the amount of information one receives from experiments and prototypes. Markus Diebel, an IDEO industrial designer, told us, On every project, we have our hands on a risk dial; we have designers on one side pulling it toward the red line, and our clients and their systems on the other side pulling it toward the safe zone. In Markuss minds eye, there is a glossy, black-anodized aluminum risk dial, and his goes to eleven. Such is a design thinkers thirst for learning that they actively seek out failures, and even intentionally increase the frequency at which they occur. They then trumpet those failures, rather than hiding them, knowing that the feedback they receive will put them ahead in the long run. Which brings us to our next insight. Insight #2: Designers take risks to learn. All of this might sound scary to someone who practices businessas-usual. Are designers all about the adrenaline rush? A clue can be found in what we heard from Madison Mount, who co-leads IDEOs work in the food and beverage arena: Im slightly addicted to risk. If Im not taking risks, I feel uncomfortable, because Im not learning. Designers arent hooked on adrenaline: they are hooked on learning, and embracing and amplifying risk is a way to learn. The more you try, the more you learn; and the more you
learn, the greater the likelihood that you can design a new and better experience for a user. Designers want to have a meaningful, positive impact in the world, and they recognize that taking risks is the way to get there. So if you were to poke your head inside the door of a businessby-design organization, would it look like a scene out of Mission Impossible? Would designers be riding motorcycles with scissors in their hands or setting things on re to see what happens in the name of positive impact? Not exactly. Theres something keeping the paramedics and retrucks away. That force is an approach to innovation that regular readers of this magazine know well: design thinking.
Insight # 3: Designers embrace risk, but their process of thinking mitigates it. Design thinking uniquely combines conscious risk taking with structured risk mitigation. This is a fascinating paradox: designers embrace risk, but the way they think mitigates it. Each of the three behavioural building blocks of design thinking empathy, prototyping, and storytelling serves to simultaneously embrace and mitigate risk. Empathy Design thinking starts with people and looks for evidence of desire. This is one of the most fundamental ways to mitigate risk. Why? Because marketing things that people dont want increases ones risk of failure substantially. Ask yourself, what is the bigger risk: placing a bet on a value proposition that customers are asking for either latently or directly, or investing in an idea that springs from the cloistered assumptions of a conference room deep within your company? In a recent innovation project, design thinkers from both IDEO and a bicycle-manufacturing client listened deeply to what potential customers said and felt. The conclusion they arrived at was not at all what they expected: instead of a desire for more technical extreme biking experiences, what non-consumers of modern bicycles truly desired was a simpler, more joyful biking experience. And so they designed a much simpler experience, at the root of which is a bike that eschews complex, over-serving product features in favor of a simple foot-operated brake and an automatic gearbox. Risky? Yes, but only relative to the ingrained bias of the bicycling industry.
Prototyping Design thinking encourages you to gather feedback long before an idea, concept or story is nished. A prototype, in the hands of a design thinker, is nished when it can teach them something. The goal of prototyping is to accelerate feedback and failure. Failing indicates that you havent quite yet nailed the experience, and suggests what you might try next. Prototyping lets you nd problems, but it also teaches you to let go of ideas that arent fruitful.Failure due to sins of commission (as opposed to those of omission) is not a personal indictment, but an incitement to go out and create another prototype. Imagine what could have been if the creators of Iridium, a global mobile phone service, had approached their challenge of orbiting 77 geo-stationary communications satellites from a prototyping mindset. In addition to the service being expensive, a severe drawback of Iridium was a lack of user satisfaction with the phone handsets, which were bulky and didnt work well inside of buildings both fundamental value-proposition aws. In the end, Iridiums $6-billion-dollar system was not viable, resulting in a re sale for $25 million. Could the Iridium team have used prototyping to uncover these and other system aws while they were still actionable? Were not technical experts in satellite deployment, but with the optimism that comes with a design thinking approach, anything can be prototyped.The real risk lies in not doing so. Storytelling Crafting and telling simple, emotional, concrete stories is a critical part of the design thinking approach. Focusing on storytelling ensures that the essence of the value proposition is communicated and understood in a way that allows people within an organization to learn and act. This essence is what Chip Heath, co-author of Made to Stick, calls command intent. Telling stories that people can internalize is a way to reduce execution risk they will execute with a common vision in mind. In the absence of data and direct execution experience, well-told stories might be the only way to inspire action and ensure that all parts of an organization are on the same page. Recently Len Wolin, a senior director of program management at Ritz-Carlton, was looking for ways to bring a little something extra out of each hotel that would help to make the experience personal, unique, and memorable. An IDEO team worked with his organization to create a set of scenography workbooks meant to help each individual hotel create localized service experiences, such as a warm, personalized check-in process or a big night in. These workbooks outlined the key elements of experience scenes using a series of photos that told an evocative story. The key was to communicate the principles driving the Ritz brand experience without prescribing the solution for individual hotels. Storytelling like this created broad corporate alignment and encouraged local creativity all at once, a wonderful formula for effective execution. Getting started No matter your context, a design thinking approach can help you
deal with risk in a more productive, generative manner. Here are seven ways to get started:
1. Cultivate an unreasonable obsession with desirability As we mentioned earlier, beginning with real people and what they need and value is the most fundamental way to mitigate risk. Design thinkers look for evidence of human desire and needs via an unreasonable (by business-as-usual standards) obsession with what is desirable. Why did the Mini become a best-seller for parent company BMW (nancial success) as well as the iconic hot-hatch of the 21st century (brand success)? If you look at the competition, it wasnt the fastest option, nor was it the most reliable. But the Mini cornered the market on desirability on three counts. Its Ive-seen-you-before-and-youre-a-cute-rascal styling grabs us viscerally, its a hoot to drive, and masterful reective design in the form of cheeky billboards and interactive magazine ads convinced our brains that wed be better humans if we owned one. The Mini is the product of an unreasonable obsession with desirability. You can cultivate your own desirability chops by using these three experience elements from Don Normans book Emotional Design visceral, behavioural and reective to analyze the offerings and services in your own life that make you happy. 2. Become more comfortable acting on your informed intuition In a speech at Harvard, Andy Grove made an important point about the relationship between risk and intuition, saying I think it is very important for you to do two things: act on your temporary conviction as if it was a real conviction; and when you realize that you are wrong, correct your course very quickly. When faced with a risky decision, and lacking complete data which would only be available at some point in the future, a design thinker decides based on their informed intuition. Design thinkers use their informed intuition and personal evidence to reduce the likelihood that they embark on a journey of solving the wrong problem. Designers know that waiting for perfect data is often the riskiest move of all. Its not as hard as you think to begin to shape and form your own informed intuition.As you create something new to the world, simple conversations with lead and expert users might tell you more than what any detailed survey could tell you. When it does come time to begin looking for explanatory data, uniqueness may be more important than liking or purchase intent. 3. Prototype, prototype, prototype We believe a key measure of the effectiveness of any innovation system is the time it takes to arrive at a rst prototype. Be it Paul MacCready crashing and building and crashing his human-powered Gossamer aircraft in rapid succession, or the crew at Pixar creating incredibly-rough videos of movies like Monsters, Inc. months and years before the start of nal production, quickly iterating prototypes is a signature way to mitigate risk by giving you risk-killing information.
To put this into action, take that challenging project that has you worried right now and list ve or six assumptions you have about potential solutions. Now build something that helps you test one of your assumptions. That something could be a physical model, a quick video showing what the human experience would feel like, or even a reverse income statement. Then walk next door (or to the next cube) and put it in front of your colleague (or your spouse or your mother). What did you learn? Repeat this process again and again. A key metric: how long is it taking to get feedback on your Big Idea from another human being?
4. Think big, but start small(er) Think big, but use constraints such as schedule, headcount, and scope to learn more about what it will take to execute your bigpicture value proposition without spending big-picture amounts of energy, money and time. Designers love constraints because they give them a toehold, a place to get traction, even in the most slippery of ascents. Limiting the scope of your initial efforts (without losing site of the vision youre heading toward) is an effective way to prove viability. And limiting scope makes it easier to prototype, which, in a virtuous cycle, accelerates feedback about which constraints to keep applying energy against. In the end, its less risky to scale a viable proposition than it is to try and make viable an operation already at scale. Design thinkers at Turner Entertainment Group in Atlanta have been thinking big but acting small in order to bring a disruptive business model to market. David Rudolph, a Turner development executive, challenged his team to create an in-market prototype of an Internet-based television business to satisfy the rabid desire of Atlantic Coast Conference basketball fans to watch untelevised games. However, they had to do it for less than $35,000 in xed costs and $1,200 per game. The result? Each of Turners small experiments can be cashow breakeven after only a few months of existence. Focusing only on business viability plus customer desire instead of on getting big was a risk; but it enabled Turner to learn a lot about their customers and their own business model. 5. Treat money as a positive constraint Money is just another constraint, but its such an important one that we had to give it its own billing. Money is the grease, yet paradoxically, having less of it can make things move faster and seems to also help brains think more clearly. Jaime Lerner, a renowned Brazilian architect, urban planner, and mayor of Curitiba, says that creativity starts when you lose a zero from your budget. To boost usage of the Curitibas public transit system, and without access to piles of money or time, Lerner created a lottery which used bus fare as lottery tickets. Treating a lack of money as a positive constraint helps strip away the fatty nancial insulation that success builds up. Leaner budgets are less risky because they make it harder not to act.
6.Make a list of the best things that could happen Ross Mayeld, CEO of Socialtext, is a Silicon Valley entrepreneur with an interesting approach to formulating strategy. As a planning exercise, I always try to ask two questions: How could we take more risk? and What risk can we take that creates the greatest amount of options? As we saw earlier, with Markus Diebels 11-digit risk dial, people who employ design thinking know that amplifying risk is a way to create more evidence of what works and what doesnt.When Ross Mayeld thinks of ways to take more risk, hes actually reducing the long-term risk of his venture by uncovering the kinds of long-term business opportunities that are the lifeblood of a thriving organization. He creates real options, because this risk-embracing activity puts you in to the ow of opportunities he would not have known existed without thinking through risky scenarios. 7. Seek challenges Organizations are but groups of people, and in our work at IDEO we see over and over a direct correlation between the design thinking abilities of individuals and the innovation quotient of the organization they belong to. It is hard for an organization to be pushing itself to the edge of its capabilities and learning if its people are not adept at living with risk. The ideal situation for someone trying to be innovative is one that balances clear, achievable goals with just enough task challenge so that theres a real risk of failure enough to light their res of creativity. Design thinking is the methodology individuals can hang on to in order to navigate challenges and risk. As they do so, they will learn and grow, and in their personal growth is the wellspring of creativity and innovation to feed larger innovation efforts. Embrace Risk and Reap the Rewards In business as in life, we all seek to reduce and manage risk, but we also need to grow and innovate.The best way to achieve both is to embrace risk while also mitigating it. At a personal level, design thinking is a life skill that gives us the tools to recognize risk and act in ways that mitigate it so that our dreams big and small can come true. For organizations, this approach provides a consistent and proven way to structure challenging innovation initiatives so that they become less risky. We cant all be designers, but we can use aspects of design thinking in our lives to embrace, amplify and mitigate risk in order to create lasting value for ourselves and our world.
Ryan Jacoby leads the Consumer Experience Design practice in
IDEOs New Y ork City location.He also co-leads IDEOs Design for Business efforts, facilating the integration of business issues into design thinking. He holds an MBA from Stanford University, where he participated in many of the prototype classes at the Hasso Plattner Institute of Design, also known as the d.school. Diego Rodriguez leads IDEOs Global Business Factors group, and is based in Palo Alto. In addition, he is an Associate Consulting Professor at Stanford Universitys d.school, and a member of its board of directors. He holds an MBA with distinctionfrom Harvard. For more, read his inuential blog about design thinking at www.metacool.typepad.com.
Idea Exchange
People have a natural tendency to seek pride and avoid regret. This inuences how they treat the assets in their portfolios.
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The Big Picture
John Sterman and Linda Booth Sweeney
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John Sterman and Linda Booth Sweeney
UNDERSTANDING PUBLIC COMPLACENCY ABOUT CLIMATE CHANGE

Critical public policy issues increasingly involve complex physical and natural systems. While we all hope that societal responses to such challenges are based on the best available scientific knowledge, increasingly, effective responses to important public policy issues require changes in the beliefs and behaviours of the citizenry at large. Science tells us that seatbelts save lives and that smoking causes cancer, but if members of the public dont understand why, they may ignore the best scientic advice. If widely-held mental models of complex systems are faulty, people may inadvertently favour policies that yield outcomes they neither intend nor desire. Climate change is such an issue. Opinion polls show an apparent contradiction in public attitudes toward climate change: a majority of citizens support the Kyoto Accord and Climate Stewardship Act, believe human activity contributes to climate change, and desire to limit the risk of harm from it. Yet at the same time, large majorities oppose mitigation policies, such as energy taxes. Many people advocate a wait and see strategy: when asked to choose which of several statements came closest to their own view, nearly 60 per cent chose either, until we are sure that global warming is really a problem, we should not take any steps that would have economic costs, or its effects will be gradual, so we can deal with the problem gradually. In the case of the climate, we cant wait until the damage is
(more) visible than it already is before taking action. You cant buy insurance after a disaster. Similarly, protecting ourselves and our children from the risks of climate change requires emissions reductions today. Waiting to see how bad climate change is going to get is like waiting until after your house burns down to get insurance. So why, then, do so many people advocate a wait and see approach?
Why Wait and See Wont Work Rather than assuming people are short-sighted and selsh (the usual explanation), we should ask instead what the world would have to be like for wait-and-see to be a prudent response to the risks of climate change. The answer is time delays. Wait-and-see policies often work well in simple systems those with short lags between the detection of a problem and the implementation and impact of corrective actions. In boiling water for tea, for instance, one can wait until the kettle boils before taking action, because there is essentially no delay between the boiling of the water and the whistle of the kettle, nor between hearing the whistle and removing the kettle from the ame. Few complex public policy challenges can be addressed so quickly. Wait-and-see would be a prudent response to the risks of climate change if we could quickly stop it once we saw how harmful it will be. Doing so would require short delays in all the links in the long causal chain, stretching from the detection of adverse climate impacts, to the decision to implement mitigation policies, to emissions reductions, to changes in
Atmospheric Greenhouse Gases (GHGs)

GHG Emissions
Figure 1
atmospheric greenhouse gas (GHG) concentrations, to radiative forcing, to surface warming and nally to climate impacts, including changes in ice cover, sea level, weather patterns, agricultural productivity, the distribution of species, extinction rates, and the incidence of diseases, among others. None of these conditions hold. In fact, there are long delays in every link of the chain. Some of the response delay arises from the time required to develop scientific understanding of the climate and the way human activity is changing it. That question is now settled the Intergovernmental Panel on Climate Change (IPCC) has just released its latest report, concluding that warming of the climate is unequivocal and that most of the observed increase in globally averaged temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations (see the IPCC Summary for Policymakers at www.ipcc.ch). But scientific consensus is not enough: there are additional delays required to build the public and political support needed to pass legislation and ratify international agreements. There are then additional lags between changes in policy and changes in emissions even after automakers are able to develop alternative fuel vehicles it will still take decades to turn over the existing eet of cars that burn gasoline. Infrastructure and settlement patterns change even more slowly. The longest response delays, however, arise within the climate itself from the stock-and-flow relationships among GHG emissions, GHG concentrations, and global mean temperature. Two stock-ow structures are fundamental: global mean surface temperature integrates (accumulates) net radiative forcing (minus net heat transfer to the deep ocean); and in turn, radiative forcing is affected by the level of GHGs in the atmosphere, which integrates emissions less the rate at which GHGs are removed from the atmosphere. GHG emissions are now roughly double the net rate of GHG removal by natural processes, which include net uptake by biomass, the ocean, and other sinks. Even if policies to mitigate climate change caused these emissions to fall, atmospheric GHG concentrations would continue to rise until emissions fell to the removal rate. GHG concentrations can fall only if emissions drop below removal. Warming would continue until atmospheric concentrations fell enough, and global mean temperature rose enough, to restore net radiative balance. Global mean surface temperature would then peak, and climate changes such as sea level rise from ice melt and thermal expansion would continue. The belief that wait-and-see policies are prudent implicitly presumes that the climate is roughly a rst-order linear system with a short time constant, rather than a high-dimensional
GHGs in Atmospere
Net Removal
dynamical system with long delays, multiple feedbacks and non-linearities that might cause abrupt, persistent and costly changes.
Understanding Stocks and Flows Why do people underestimate the time delays in the response of climate to GHG emissions? Obviously, the average person is not trained in climatology, and studies document low levels of public understanding of climate processes. We hypothesize, however, that widespread underestimation of climate inertia arises from a more fundamental limitation of peoples mental models: a weak intuitive understanding of stocks and ows, and the concept of accumulation in general, including principles of mass and energy balance. Prior work shows people have difculty relating the ows into and out of a stock to the trajectory of the stock, even in simple situations such as lling a bathtub or managing a rms inventory. Instead, people often assess system dynamics using a pattern matching heuristic, seeking correlations among the data and using these to project future values. Pattern matching often works well in simple systems, but fails in systems with signicant stock-and-ow structures: a stock can rise even as its net inow falls, as long as the net inow is positive. For example, a nations debt rises as long as its scal decit is positive, even as the decit falls; debt falls only when the government runs a surplus. Since anthropogenic GHG emissions are now roughly double net removal, atmospheric GHGs would continue to accumulate, increasing net radiative forcing, even if emissions drop until emissions fall to net removal (of course, removal is not constant; we consider the dynamics of removal below). In contrast, pattern matching incorrectly predicts mean temperature, and atmospheric GHGs closely track emissions; hence stabilizing emissions would rapidly stabilize climate, and emissions cuts would quickly reverse warming and limit damage from climate change. People who assess the dynamics of the
For a wide range of everyday tasks, people have no need to infer how ows relate to stocks it is better to simply wait and see how the state of the system changes, and then take corrective action.
climate using a pattern-matching heuristic projecting past correlations among emissions, CO2 concentrations, and temperature will significantly underestimate the lags in the response of the climate to changes in emissions and the magnitude of emissions reductions needed to stabilize atmospheric GHG concentrations. We recently conducted experiments to determine the extent to which highly-educated adults understand the fundamental relationship between ows of GHGs and the stock of GHGs in the atmosphere and found signicant misperceptions of basic climate dynamics in a population of graduate students at an elite university. Pattern matching was widespread; worse, a large majority violated fundamental physical constraints, including conservation of mass. Most believed atmospheric greenhouse gas concentrations can be stabilized even as emissions into the atmosphere continuously exceed removal of GHGs from it, analogous to arguing that a bathtub lled faster than it drains will never overow. These beliefs favour wait-and-see policies, but violate basic laws of physics. An evolutionary perspective may shed light on why pattern matching dominates stock-ow reasoning. Decisionmaking consumes scarce time and cognitive resources. Selection pressures favour the evolution of fast and frugal heuristics that are successful to the degree they are ecologically rational, that is, adapted to the structure of the information in the environment in which they are used. The overwhelming majority of everyday experience involves simple systems where cause and effect are closely related in time and space, time delays are short, and information cues are highly correlated. The water in the teakettle boils and the whistle sounds; eating certain mushrooms is quickly followed by illness. The ability to detect correlations among cues in the environment is highly rewarded, and peoples judgments about causal relationships are strongly conditioned by proximity and co-variation. In contrast, it is not necessary to understand stocks and
ows to ll a bathtub the water accumulates automatically. It is far more efcient to watch the water in the tub and shut off the tap when it reaches the desired level. For a wide range of everyday tasks, people have no need to infer how ows relate to stocks it is better to simply wait and see how the state of the system changes, and then take corrective action. Wait-and-see is therefore a valuable heuristic in common tasks with low dynamic complexity, where delays are short, outcome feedback is unambiguous and timely, opportunities for corrective action are frequent, and the costs of error are small. None of these conditions hold true in dynamically complex systems like the climate, where there are multiple positive and negative feedbacks, delays between actions and impacts are long, outcome feedback is ambiguous and delayed, many actions have irreversible consequences, and the costs of error are potentially huge.
The Quest for Understanding When policy implementation depends on widespread citizen understanding and behaviour change, risk communication is as important as risk assessment. Perhaps people understand stock-ow relationships but are unable to apply their knowledge to climate change due to inadequate background knowledge of climate and GHGs. If that is true, education about the sources of GHGs, the biogeochemical cycles that regulate them, and their role in radiative forcing would overcome the problems observed here. While surely needed, such education is not sufcient. Prior research shows pattern matching and violations of conservation principles are prevalent in much simpler contexts requiring no specialized background knowledge, for example, lling a bathtub. In a prior study, we presented subjects from the same elite university population with a picture of a bathtub and graphs showing the inow to and outow from the tub. Extremely simple patterns for the inow and outow were used, and more than half violated the most basic stock-ow relationships for example, failing to show that the water level rises when inow exceeds outow, and falls when outow exceeds inow. Better information on climate or the carbon cycle is unlikely to overcome weak knowledge of stocks and ows and consequent violations of conservation laws in intuitive assessments of policies to address climate change. These awed mental models support the belief that it is best to wait and see if further warming will be harmful before supporting action. Misconceptions of stocks and ows may be an important part of the explanation for the contradiction between the publics desire to limit climate change while simultaneously arguing for wait-and-see policies that ensure the anthropogenic contribution to climate change continues to grow.
The pervasive violation of these physical principles stands in contrast to the common explanation that people oppose stronger actions to cut emissions because they are short-sighted and self-interested, discounting the future at high rates. Rather, people may simply, but erroneously, believe that stabilizing emissions quickly stabilizes the climate.
The Role of Risk Communication It would be naive to suggest that educating the public about stocks and ows would somehow cause people to suddenly support emissions reductions consistent with their avowed desire to limit the risks of harmful climate change. Successful implementation of policies based on the best available science is a process of knowledge diffusion and social change that involves word of mouth, imitation of trusted authority gures and respected elites, media inuence, and emotions, not only rational judgments of costs and benets. The adoption and diffusion of innovations, whether new products or new beliefs, is facilitated when the innovation is simple, easy to test, has clear advantages over alternatives, and where costs and benefits are quickly and easily observed. Climate change ranks poorly on all these dimensions: it is complex, policies are difcult to test, and the benets of emissions reductions are delayed and ambiguous. When people cannot readily assess costs and benets for themselves, and when they are unable to interpret the best available scientic evidence, imitation of elite reference groups, word of mouth, media and marketing play stronger roles in opinion and behaviour change. Effective risk communication strategies are tailored to suit the mental models of the audience. As Granger Morgan, a risk communication expert at Carnegie Mellon University, and colleagues argue, Rather than conduct a systematic analysis of what the public believes and what information they need to make the decisions they face, [policymakers] typically ask technical experts what they think people should be told. Those passing judgment may know very little about either the knowledge or the needs of the intended audience. Under such conditions, it is not surprising that audiences often miss the point and become confused, annoyed, or disinterested. If the communicators feel that they have done everything that is expected of them, they may conclude that their audience was responsible for the communications failure. Most scientic and popularized accounts of climate change do not present the fundamental stock-ow relationships among emissions, removal, GHG concentrations, radiative forcing, and temperature in ways the highly educated subjects here, much less the public at large, can understand. The language is highly technical, requiring knowledge of terms such as CO2, gigatons of carbon equivalents, ppm, radiative forcing, albedo, and so on. Overwhelmed by technical detail, peoples mental models lead them to rely on pattern matching and correlations rather than stock-flow reasoning. Effective communication about climate change should help people understand these relationships in familiar terms. Pictures of stock-ow structures such as bathtubs with tap
and drain have proven effective in fostering greater understanding and policy change in a number of settings, from automobile leasing to the war on drugs. The prevalence of basic misconceptions about stocks and ows among highlyeducated subjects suggests the climatology community should consider similar representations in communications designed for both the public and policymakers.
In Closing Successful implementation of policies to address problems such as climate change requires broader public understanding of the need for emissions reductions. Building that understanding requires that we rst understand the mental models ordinary folks use to think about the issue, and then create learning environments in which people can discover, for themselves, the relationships among greenhouse gas emissions, atmospheric concentrations, and the climate. Our research shows that even highly educated people erroneously believe that emissions, atmospheric concentrations, and climate are highly correlated. This belief leads to the erroneous conclusion that a drop in emissions would soon cause a drop in CO2 concentrations and mean global temperature. Mean surface temperature keeps rising as long as radiative forcing (minus net heat transfer to the deep ocean) is positive, even if atmospheric CO2 and hence net forcing falls. Atmospheric CO2 keeps rising even as emissions fall as long as emissions exceed removal. Because emissions are now roughly double net removal, stabilizing emissions near current rates will lead to continued increases in atmospheric CO2. In contrast, most subjects believe atmospheric CO2 can be stabilized by stabilizing emissions at or above current rates, and while emissions continuously exceed removal. Such beliefs analogous to arguing a bathtub lled faster than it drains will never overow support wait-and-see policies, but violate basic laws of physics. People of good faith can debate the costs and benets of policies to mitigate climate change, but policy should not be based on mental models that violate the most fundamental physical principles. The scientic community must devote greater resources to developing public understanding of these principles to provide a sound basis for assessment of climate policy proposals. An interactive simulator to help people understand stocks and ows is available online at: http://web.mit.edu/jsterman/ www/GHG.html.
John Sterman is the Jay Forrester Professor of Management at MITs Sloan School of Management, and director of the MIT System Dynamics Group. He spoke in the Rotman Integrative Thinking Seminar Series in 2003. Linda Booth Sweeney is an educator, author and consultant, specializing in
systems thinking. She has taught a course on Systems-Based Inquiry to Harvard and MIT graduate students.
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Questions for:
David Apgar
Q
&A
The author and consultant describes how individuals and organizations can raise their risk intelligence.
After spending the early part of your career working in nancial risk management [with Lehman Brothers, McKinsey, and the U.S. Treasury Department], you came to challenge the notion that risk management is strictly for nance, going so far as to call it a core strategic discipline. Please explain. The truth is, most of the risks that business people face today are non-nancial. In my work, I began to realize that the best nancial risk management theory and practice in the world really didnt address the needs of people running non-nancial businesses. Financial risk management doesnt have to deal with the vast differences in what and how fast people can learn about real risks: operating risks, technology risks, security risks and strategic risks. I saw too many instances of people trying to shoehorn these non-nancial risks into the standard nancial risk management framework. Lets take a moment and look way back, to pre-historic times. Imagine two cave-dwelling humans, and one says to the other, Ill take care of hurling our spears, and you handle the spears coming at us. The modern version of this would be a manager saying, Ill handle the growth strategy, and you folks in the back ofce can handle the risk strategy. And while many of todays managers would likely rise above that temptation, risk management is really complex. Its very easy for a general manager responsible for revenues and contributions to the nal results of a large company to say, risk management is a specialty, so Ill focus on growth, and let the specialists take care of risk. My view is that its time for general managers to take back risk strategy, because in todays world, it cannot be separated from growth strategy. Analysts can tease risk assessments out of all sorts of statistics, but only business managers can make the required judgments about which strategic risks matter. Describe the difference between learnable risks and random risks. One of the central questions about risks is whether and how much we can reduce them by learning more about them. Learning about a risk involves two things: rst, the formulation of possible solutions to problems posed by the risk, or possible answers to questions about what drives it. Second, it requires experience that can show which solutions may be right, which are wrong, or whether we need more options. Learnable risks are those that reect uncertainties, but the uncertainties are a matter of our ignorance. Weather would be an example: neither you nor I can predict the weather with much certainty, but wed probably both agree that its the result of determinate causes. Purely random risks are quite different, and I include among
Learnable risks are those that reect uncertainties, but the uncertainties are a matter of our ignorance. Purely random risks are quite different, in that theyre indeterminate.
them the risks reecting uncertainties arising from prices in complete markets like stock price indexes, interest rates, and exchange rates. These are purely random, in that theyre indeterminate: no one can have an advantage in assessing them in the same way that you can have an advantage in assessing a learnable risk like the weather. Unlike nancial risks, we can almost always learn something about non-nancial risks. The question is, can we learn as much as others facing similar risks? I have a chapter in the book on adaptive networks, which encourages managers to think about the network of suppliers, customers, and other complimentary business organizations that constitute their risk network. I classify types of strategic risks or business risks, to help managers understand what kind of role in their networks they should play in dealing with a particular kind of risk, and to recognize which risks it makes sense to transfer to their business partners. For example, when it comes to the risk of a certain type of software becoming obsolete, you might want a customer to bear more of that risk. And usually when you do that, everybody understands whats happening: you sell the product at a lower price, but the risk is transferred to the customer. In other cases, the supplier may be better positioned to bear the risk. It depends on how diversiable the risk is within your organization, and what its market intensity is. Thats going to help you gure out if you should be pushing the risk further up your supply chain or further down to your customer or end-market chain. So there are some steps you can take to deal with random risks; but learnable risks are those which, by denition, you can actually get better at predicting, so I like to focus on the possibilities around that.
Most of our readers are familiar with emotional intelligence, but what is risk intelligence, and how is it measured? Risk intelligence refers to an individual or an organizations ability to weigh learnable risks effectively. It involves classifying, characterizing and calculating threats; perceiving relationships; learning quickly; storing, retrieving and acting upon relevant information; communicating effectively; and adjusting to new circumstances. Evaluations of risk intelligence are risk-specific, as well as being specific to your organization. Ive devised a simple test of risk intelligence consisting of ve questions: 1. How often do you acquire information related to the risk? 2. How relevant is the information to possible causes of the risk? Does it test your theories about the risk?
3. How surprising does this information tend to be? Does it have a large impact on your views? 4. How diverse are the sources of information that you use in learning about the risk? Do you talk to customers as well as suppliers, for instance? 5. How well do you keep records of and share this information? Do you make it available to people on the front lines?
For each of these ve elements, score yourself between 0 and 2: give yourself a 2 if your experiences or your firms business interactions put you in a better position than others to reach accurate judgments; a 1 if theres no reason to think youre different; and a 0 if you think others may do better. Total scores range from 0 to 10, with 5 being the average. A high risk intelligence score means simply that you think, as far as you can tell, that your organization is likely to weigh a class of risks more effectively than others. And a low score means that for that particular risk, your organization may be in a weaker position than others. Obviously, you should avoid projects with the lowest scores but when that isnt possible, you can use the scores on each element to develop a roadmap for improvement.
One of the myths you debunk in your book is that, there is no pattern to how risks evolve. Please explain your thinking on this. Two things change in every risky-business initiative from a risk perspective: rst, our risk intelligence for the principle risks underlying the initiative. Were always running experiments, we often dont know much about them, but we select the most promising ones, and we learn about them, and we essentially raise our risk intelligence as we do this. The other thing that changes is the diversiability of the principle risks underlying an initiative. By that I mean, how well do the risks correlate to the other risks in the business? When our prots go up and down, do the results from this risky project go up and down? And the less those two things correlate, the more diversiable the principle risks are for that initiative. If you think about it, the successful experiments are likely to grow to become more important to your organization and therefore by denition, the risks become less diversiable. When IBM started its Solutions division which involved broader consulting activities for its clients the risks associated with its consulting business were highly diversiable, in that they were very unlike the core risks of IBMs hardware business. But as Solutions became a larger part of the companys revenues, it became naturally impossible to diversify those risks.
So at rst, your risk intelligence rises for a successful project, then the diversiability of the risk declines, and with these two factors changing, all risky initiatives follow a sort of trajectory, or a pattern, as they evolve. I call it a risk pipeline. Projects are only protable at one point of that pipeline in the middle part, where risk intelligence has risen and diversifiability is beginning to decline. But projects never stop moving with respect to these two elements, and that leads to a very simple lesson, which is that we all have to keep learning. Not just because its nice to keep learning, but because the projects that we undertake must keep evolving. Like a nice wine, their risk proles will grow better for a while; but then theyll go bad.
What is the rst step for an individual or organization that wants to systematically raise its risk IQ?
youve run an assessment for each of the risks, you keep nding a certain weakness maybe under the relevance of your businesss information sources, or surprise, or diversity, or any of the other ve measures. And then, youre in a position to troubleshoot. If youre looking at a list of ten possible projects of which youre going to actually pursue three this upcoming year you can assign a level of risk intelligence and risk diversifyability to each potential project, and make an informed judgment. In doing this, youve essentially conducted a risk strategy audit: youve got a picture of your risk strategy thats as clear and easy to discuss with your colleagues as your rms growth strategy. And thats the way it should be.
The rst step is to identify the major, recurring strategic risks that you nd in the initiatives your organization considers. Keep it simple: list these risks at a level of generality so that youre never looking at more than six-to-eight buckets of risk. You can do this with a paper and pencil no need for consultants or computer programs. At this level of generality, youre in a position to run a risk intelligence assessment on each of the six-to-eight items, and you can also estimate their diversiabiilty. Look for patterns: ask yourself whether, once
David Apgar is the managing director of Washington DC-based Corporate
Executive Board, and the author of Risk Intelligence: Learning to Manage What We Dont Know (Harvard Business School Press, 2006.) He teaches a course on Risk Management and Development at Johns Hopkins School of Advanced International Studies.
INNOVATIVE SOLUTIONS
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Questions for:
Ian Bremmer
&A
The head of the worlds largest political risk consultancy on the J curve, universal values, and American stability.
Interview by Stephen Watt
What is the J curve, and what can it tell us about global political and economic risk? The J curve is an effort to explain how a countrys stability relates to its openness. It answers the question, why it is that countries do or do not fall apart? Why is the J curve relevant to global markets? Many reasons: because of the ow of global energy, the economic importance of China, the impact of rogue states, organizations and individuals on world markets, and because of the nature of the global balance of power shifting away from the United States and the U.S.-led hegemonic system. All of these things make the stability of countries matter not just to policy-makers in Ottawa, Washington and London, but to institutional investors and decision-makers in multinational corporations. Eurasia Group, the political risk consultancy you founded in 1998, has worked with more than 200 multinational clients,
including Google, AIG and Goldman Sachs. In this era of globalization, why is it so vital for corporate leaders in particular to develop a rened sense of political risk, as opposed to solely looking at a countrys economic prospects?
In a sense, we were the rst people that really brought political science to Wall Street. When I rst came to New Y ork after a couple years as an academic, I talked to people in banks and explained why I thought I was relevant. The response was, Thats all fascinating, but we dont hire people like you. They had economists and strategists they even had physicists, because chaos theory is important for derivatives modeling but they didnt hire political scientists. Increasingly, however, there is a recognition that global stability is an important part of understanding risk and balancing portfolios. I would dene an emerging market as a country where politics matters at least as much as economics to market outcomes. Take the example of China. Wall Street is very bullish about China, where it sees great economic growth. However, the fact that China is likely to grow does not mean that you as a multinational executive are going to benet from that growth. Y ou have to focus on the decisions being taken by the Chinese government, the nature of the relationship with state-owned enterprises, who your joint venture partner is, and your regulatory environment, which is increasingly opaque. Even in the context of a growing Chinese economy, politics matter. The more we see China globalizing, the more we see local demonstrations and social discontent. Individual Chinese citizens are able to communicate with each other in a way they never did before, and the Chinese government is fundamentally uncomfortable with these political challenges. Over time, the process of economic globalization and political globalization will come head to head. And thats just China. Look at where energy is coming from. Its not the Gulf of Mexico or the North Sea: those are mature elds. Increasingly, energy is coming from West Africa, the Persian Gulf and the Caspian Basin, parts of the world where politics really matters.
America has long stood for individual rights and freedoms, yet it continues to do major business with countries where political pluralism and free expression are generally suppressed. Is this hypocrisy or just good policy? I think its both. The reason its hypocrisy is that the United States pretends it has universal values, such as human rights and democratization, that it applies everywhere. In reality, there are different types of interests that need to be balanced. And of course, they are balanced. When the U.S. deals with Pakistan, it not only has to consider human rights and the nature of the relatively authoritarian Mussharif government, but also the nature of Pakistani cooperation with the U.S. on nuclear proliferation. Similarly, the U.S. continues to support Israel, which has, in all likelihood, a couple hundred nuclear weapons. The U.S. also recently supported a nuclear deal with the Indian government. The Iranians have come out and said, Look, you say you oppose proliferation, but what about this policy with Israel and with
India? The U.S. has different benchmarks in terms of who can and cannot be nuclear on the basis of the nature of those countries, and rightly so. North Korea cant be trusted to be as responsible with a nuclear weapons program. They proliferate ballistic missile technology, and support drug and human trafcking. Its much more dangerous to the world to have a nuclear North Korea than it is to have a nuclear India. The U.S. needs to frankly acknowledge that it does not and cannot have a universal policy toward non-proliferation. A universal policy sounds great, but it doesnt work if youre a policy-maker. It also doesnt work, of course, if youre an investor. One of the nice things about being a political science rm that focuses on the market is you cut through a lot of the ideologically-driven policy speak that comes out of the think tanks in Washington. If youre a political scientist that focuses on the market, you have the luxury of only having to be right.
You argue that attempts by the U.S. government to use sanctions and other isolationist measures to curtail the ruling regimes of Iran, North Korea and Cuba have failed, and in fact, have the opposite of their intended effect. Please explain. The J curve will tell you if youre a country that is on the left hand side of the curve, youre stable because youre closed. Y our people do not have access to the international marketplace of ideas, goods and services, and lack the ability to communicate freely with one another. The fastest way for Kim Jong-il to lose power in North Korea is to suddenly allow international investment into his country, and let the North Koreans actually see what theyre missing, and how badly theyre really doing. The government maintains complete control of its borders, and doesnt allow travel outside the country, or any communication with the outside world. When the United States says theyre going to punish the North Koreans by isolating them, thats like threatening a drowning man with a life boat. Thats true of North Korea; it was true of Afghanistan under the Taliban; it was true of Iraq under Hussein; its increasingly true of Iran under [President Mahmoud] Ahmadinejad and [Supreme Leader Ayatollah Ali] Khamenei; and its been true of Cuba under Castro. A few years ago, when the Clinton administration made an effort to reduce sanctions against Cuba, the Cuban government responded by shooting down an American aircraft. The response was the Helms-Burton Act, which tightened sanctions, and the result was that the Cubans were happy again. These are countries that need isolation to maintain stability. Thomas Friedman of The New York Times famously argued that globalization has triumphed and the world has become at? Whats your view? The world has become flatter, there is no question. What Friedman was talking about was the supremacy of economics and the global markets after collapse of the Soviet Union. Yet we need to recognize that politics matters increasingly to the markets, and that is a fundamentally different paradigm. Its a
We need to recognize that politics matters increasingly to the markets, and that is a fundamentally different paradigm. Its a logical consequence of the reduction in U.S. power, and the growth of importance of countries like China and India.
logical consequence of the reduction in U.S. power, and the growth of importance of countries like China and India. Other factors include the threats presented by rogue states, individuals and organizations to the global markets, the nuclear proliferation of Iran and North Korea, the increasing instability in the Middle East, and the potential lack of viability of the Chinese political system over the long term all of these things mitigate the atness of the world. If the Eurasia group and The J Curve accomplish anything with regard to making people focus on political risk, its to demonstrate the increased level of obstacles that exist to Friedmans paradigm.
The J Curve makes a persuasive case that, when it comes to the foreign policy decisions of the U.S. and its allies, an entirely new direction is needed. What hope do you have that your book will have a real impact on foreign affairs internationally? Ive received some very strong input and interest from 10 Downing Street, the Japanese government and some governments in the Middle East, who have asked me to come and talk to them at a much higher level than I would have initially expected when I put the book out. The timing is right. Things are going sufciently badly in a number of areas of the world that people are looking for a new way of thinking about these issues. But the timing is not perfect. At the end of the day, the United States is not prepared to accept less of a role globally. Y ou see this with the Baker Study Group on Iraq, which was just as unilateral, in terms of dealing with U.S. interests in the Middle East, as was the Bush administration in deciding to go to war. The study group wasnt really interested in engaging with Americas Middle East allies or with the British it was interested in nding a way, unilaterally, to withdraw. As long as the Unites States continues to think what is important is nding a way to pursue its interests and is unprepared to actually engage internationally, it is going to have real problems. Unfortunately, its the same problem whether youre talking about the proliferation paradigm and the fact that the
Non-Proliferation Treaty is completely broken, or global warming and the worlds complete inability enforce the Kyoto Accord. The international architecture of today was created to deal with the geopolitical environment of the Cold War, and that architecture is not going to change until a crisis hits. There will have to be a disaster or near-disaster, whether its global warming or a massive terrorist attack: hopefully it will be a near-miss as opposed to a hit. Sooner or later it will be necessary to take a dramatically different path. The question is how much pain do we have to endure before we get there.
Unfortunately, a severe crisis of the type you describe might arouse a more severe and unilateral response, rather than one that is multilateral in nature. If it does and I warn about that in the conclusion of my book then its only going to hasten the American decline. The good news about the United States is that its stability was created over generations, and cant be easily disturbed. The U.S. had a presidential election in 2000 that was considered by a majority of the population to be stolen, and you know what? It didnt matter. It didnt affect American credit ratings or foreign direct investment, and it didnt lead to riots in the streets. You nd the same stability in Canada, Europe and a number of other countries. The problem is, when it comes time to make a real change, when there is a real threat, countries that are very stable often take a long time to move. Thats why its so critical to join in the debate now. When life gets difcult and big choices have to be made, we need more people out there with alternative ways of thinking.
Ian Bremmer is president of Eurasia Group, the worlds largest political risk
consultancy. His latest book, The J Curve: A New W ay to Understand Why Nations Rise and Fall (Simon and Schuster, 2006) was selected by The Economist as one of the best books of 2006. He lives in New Y ork City and teaches at Columbia University.
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Point of View:
Michael Mauboussin
RISKY BUSINESS
Risk, Uncertainty, and Prediction in Investing
How should we think about risk vs. uncertainty? A logical starting place is Frank Knights distinction: risk has an unknown outcome, but we know what the underlying outcome distribution looks like. Uncertainty also implies an unknown outcome, but we dont know what the underlying distribution looks like. So games of chance like roulette or blackjack are risky, while the outcome of a war is uncertain. Knight said that objective probability is the basis for risk, while subjective probability underlies uncertainty. To see another distinction between risk and uncertainty, we consult the dictionary: risk is the possibility of suffering harm or loss. Uncertainty is the condition of being uncertain, and uncertain is not known or established. So risk always includes the notion of loss, while something can be uncertain but might not include the chance of loss. Why should investors care about the distinctions between risk and uncertainty? The main reason is that investing is fundamentally an exercise in probability. Every day, investors must translate investment opportunities into probabilities indeed, this is an essential skill. So we need to think carefully about how we come up with probabilities for various situations and where the potential pitfalls lie. From Uncertainty to Probability In his book Calculated Risks, Gerd Gigerenzer provides three ways to get to a probability. These classications follow a progression from least to most concrete and can help investors classify probability statements:
abilities provided they satisfy the laws of probability the exhaustive and exclusive set of alternatives adds up to one. Also, investors can frequently update probabilities based on degrees of belief when new, relevant information becomes available. Propensities Propensity-based probabilities reect the properties of the object or system. For example, if a die is symmetrical and balanced, then you have a one-in-six probability of rolling any particular side. The risk assessment in the NASA cases appears to be propensity-based. This method of probability assessment does not always consider all the factors that may shape an outcome (such as human error in the rocket launchings). Frequencies Here the probability is based on a large number of observations in an appropriate reference class. Without an appropriate reference class, there can be no frequency-based probability assessment. So frequency users would not care what someone believes the outcome of a die roll will be, nor would they care about the design of the die. They would focus only on the yield of repeated die rolls. What about long-term stock market returns? Much of the ink spilled on market prognostications is based on degrees of belief, with the resulting probabilities heavily colored by recent experience. Degrees of belief have a substantial emotional component. We can also approach the stock market from a propensity perspective. According to Jeremy Siegels Stocks for the Long Run, U.S. stocks have generated annual real returns just under seven per cent over the past 200 years, including many subperiods within that time. The question is whether there are properties that underlie the economy and prot growth that
Degrees of belief Degrees of belief are subjective probabilities and are the most liberal means to translate uncertainty into a probability. The point here is that investors can translate even one-time events into prob70 / Rotman Magazine Spring 2007
support this very consistent return result. We can also view the market from a frequency perspective. For example, we can observe the markets annual returns from 1926 through 2005. This distribution of returns has an arithmetic average of 11.9 per cent, with a standard deviation of 20.2 per cent (provided that the statistics of normal distributions apply.) If we assume that distribution of future annual returns will be similar to that of the past (i.e., the last 80 years is a legitimate reference class), we can make statements about the probabilities of future annual returns. Of the three ways to come up with probabilities, the academic nance community is largely in the last camp. Most of the models in nance assume that price changes follow a normal distribution. One example is the Black-Scholes Options-Pricing Model, where one of the key inputs is volatility or the standard deviation of future price changes. But stock price changes are not normally distributed, which has implications for our notions of risk and uncertainty, market timing, and money management. More specically, stock price change distributions show high kurtosis the mean is higher, and the tails fatter, than a normal distribution. (We may still say that a distribution exists that characterizes the market; its just not a normal distribution.) These return outliers are of particular interest in understanding the characteristics of stock market returns over time. To demonstrate this point, I looked at daily S&P 500 Index price changes from January 3, 1978, to October 31, 2005. The indexs return (excluding dividends) in that period was 9.6 per cent. I then knocked out the 50 worst days, and then the 50 best days, from the sample (just over 7,000 days). Had you been able to avoid the worst 50 days, your total return would have been 18.4 per cent, versus the realized ten per cent. Without the 50 best days, the return was just 2.2 percent. This analysis may be attention grabbing, but it lacks a point of reference. To provide better context, I calculated a mean and standard deviation based on the actual underlying data and used those statistics to generate a random sample of the same size and characteristics. When I knocked out the 50 worst days from the sample I created, the returns were just 15.6 per cent (versus 18.4 per cent for the real data). Likewise, when I knocked out the 50 best days, the return was 4.8 percent, signicantly higher than that for the real data. In plain words, this analysis shows that extreme-return days play a much more signicant role in shaping the markets total returns than a normal distribution suggests. It also makes a strong case against market timing, unless an investor has a systematic way to anticipate extreme-return days. A nal thought on extreme-return days is that they do not appear randomly throughout the time series, but rather tend to cluster (see Figure 1). So our exercise of knocking out high and low return days is not very realistic, because in the real data, these extreme days (up and down) come in bunches.
Figure 1: Volatility Is Clustered: January 1978-October 2005

Per cent Change (Daily)
15% 10% 5% 0% 5% 10% 15% 20% 25%
Volatility clusters show days with price changes greater than three standard deviations. Source: FactSet and author analysis.
How Predictions Change Future Payoffs A lot of issues surround prediction, but in this discussion of risk and uncertainty I focus on how, in markets, acting on a prediction can change the predictions outcome. One way to think about it is to contrast a roulette wheel with a parimutuel betting system. If you play a fair game of roulette, whatever prediction you make will not affect the outcome. The predictions outcome is independent of the prediction itself. Contrast that with a prediction at the racetrack. If you believe a particular horse is likely to do better than the odds suggest, you will bet on the horse. But your bet will help shape the odds. For instance, if all bettors predict a particular horse will win, the odds will reect that prediction, and the return on investment will be poor. The analogy carries into the stock market. If you believe a stock is undervalued and start to buy it, you will help raise the price, thus driving down prospective returns. This point underscores the importance of expected value, a central concept in any probabilistic exercise. Expected value formalizes the idea that your return on an investment is the product of the probabilities of various outcomes and the payoff from each outcome. Peter Bernstein once said, The fundamental law of investing is the uncertainty of the future. As investors, our challenge is to translate those uncertainties into probabilities and payoffs in the search for attractive securities. An ability to classify probability statements can be very useful in this endeavor.
Michael Mauboussin is chief investment strategist at Legg Mason Capital
Management and an adjunct professor at Columbia Business School. He is the author of More Than You Know: Finding Financial Wisdom in Unconventional Places (Columbia University Press, 2006).
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Faculty Focus:
Lisa Kramer
RISK TOLERANCE,
EQUITY PREMIUMS AND WHY THE VERY UNDERPINNINGS OF FINANCIAL ECONOMICS ARE BEHAVIOURAL.
Interview by Stephen Watt When it comes to explaining uctuations in the stock market, analysts usually look at purely economic factors like interest rates and earnings per share ratios, and steer clear of the complexities of human psychology. What is behavioural nance, and how does it help complete the picture? The field of behavioural finance doesnt attempt to trump fundamental analysis. Rather, its an adjunct to help explain what fundamental analysis cant fully explain. The eld of Behavioural Finance is essentially the melding of Psychology and traditional Finance. Researchers in the eld attempt to explain what happens in nancial markets by looking at the actions of individual market participants. For example, its been shown that most humans demonstrate the behavioural trait of overcondence. If you ask people to self rate their driving ability, about 90 per cent of them will tell you that theyre an above-average driver. Of course, only fty per cent of them are truly above average. People simply have a tendency to over-estimate their abilities. They also over-estimate their knowledge, and they under-estimate the risks that they face. This tendency toward overconfidence spills over into nancial decisions. When individuals are managing their own portfolios, they often think they know more about a stock they hold than they actually do know. Someone hears about a stock on the news, for example, and buys it based on the slim knowledge they think theyve gained. This leads to over-trading,
which in turn involves incurring higher transaction costs yet such a person is really not gaining any more performance than if they had followed a strategy of buy and hold. On balance, they can end up with much poorer performance than if they would if they had been able to control their overcondence. Another really common behavioural bias is the disposition effect. People have a natural tendency to seek pride and avoid regret. This inuences how people treat the assets in their portfolios. For example, when someone is forced to sell some stock for liquidity reasons lets say they need a thousand dollars immediately they can either sell a stock that has gone up in value, or one that has gone down in value. Investors facing that choice will usually sell the stock that has gained in value since they purchased it, even though our tax laws make it nancially more sensible to sell the stock that has diminished in value. If you sell a losing stock, you can lock in a capital loss and get a tax credit, whereas if you sell a winner stock, you have to pay a capital gains tax. The after-tax consequence is that you are better off, nancially, selling the loser stock. Despite this, time and again, investors will sell winner stocks when they could sell loser stocks, and this has been shown in a wide range of studies.
Does Behavioural Finance get the respect it deserves? Will there will be a time when stock pickers like Jim Cramer [of CNNs Mad Money] will remind viewers, for example, to beware of seasonal risk aversion? Behavioural nance is increasingly gaining respect. It helps that the 2002 Nobel Prize in Economics went to Daniel Kahneman, a psychologist who has really helped bridge the distance between Psychology and Finance. About a year ago, there was an interesting article in The W all Street Journal that summarized a long-standing debate between two nance professors at the University of Chicago. One of them, Eugene Fama, is a guru of traditional, rational, ivory tower Finance, and the other, Richard Taylor, is a real pioneer of Behavioural Finance who, since the early 80s, has been documenting the sort of behavioural biases that weve been talking about. In the article, Fama admitted he had come around to the idea that theres some merit in Behavioural Finance. So even the real traditionalists are coming to recognize that Psychology does have an inuence on the workings of nancial markets. If we take a step back, the very underpinnings of nancial economics are behavioural. What is the trade off between risk and return? It has to do with our tolerance for bearing risk and with utility maximization, and utility is an intrinsically behavioural concept. So I think were seeing some gain in acceptance in finance circles for the field of Behavioural Finance.
Personally, I dont think either camp can explain everything. Theres a lot of fundamental movement in markets, and there is some behavioural movement. Both together can go a lot further than either independently.
We sometimes forget that stock market participants are human beings who need sleep like anyone else. What effect does sleep loss from factors such as daylight savings time and Seasonal Affective Disorder have on stock market cycles? Sleep patterns have an intense effect on human cognition. Changes in sleep patterns have been shown by psychologists to affect problem-solving ability, anxiety, and generally the way we function as humans, much like the effect of jet lag. Following time changes, whether we as a population gain or lose an hour of sleep, car accident rates are affected. Interestingly, so are stock markets. If investors are becoming more anxious following time changes, it is possible they will change the way they manage risky and riskless assets in their portfolios. My co-authors and I have found that following daylight saving time changes, stock markets around the world suffer substantial losses. After having controlled for other known market irregularities, we nd very statistically and economically significant effects on stock markets around the world, and its consistent with the idea that investors, having become more anxious, are more likely to sell risky stock on the rst trading day following the time change. We can also take a page from psychologists when examining the effect of Seasonal Affective Disorder on markets. About ten per cent of the population is affected with this disorder, and they become more risk averse when theyre depressed during the fall and winter months of the year. Depressed individuals, psychologists have shown, are much less willing to bear risk. Consequently we see variations in the nancial markets based on the season. Particularly in the fall season, stock markets tend to drop, and in the winter and spring, when individuals are starting to recover from these effects, stock market returns tend to rebound and become more positive. What range of nancial markets have you considered in your research? In considering the daylight saving effects, weve looked at Canada, the U.S., Germany and Britain. Even though those countries have some non-overlapping dates for daylight saving time changes, we find that daylight saving effects are very prominent in all of these countries. In considering Seasonal Affective Disorder effects, weve looked at a large number of countries in both northern and southern hemispheres. In the countries where the location is at a more extreme latitude, for example, Sweden, fluctuations in daylight are much more extreme. Therefore, the intensity of seasonal depression is much more extreme, and the impact on nancial markets is more extreme. In countries in the southern hemisphere, like New Zealand, South African and Australia, seasons are six months out of sync, and so are these seasonal patterns.
Weve also considered the markets for very safe securities like U.S. treasury bonds, and the seasonal patterns are the reverse of what we nd in risky stocks, which is quite compelling. Weve also looked at the ow of funds between risky and safe categories of mutual funds, and found that in the fall, when investors are becoming less risk tolerant, funds are owing from more risky categories of mutual funds toward more safe categories. The reverse is true in the winter and spring.
Does an understanding of Behavioural Finance make for a better investor? It certainly can. If an investor knows, for example, about the disposition effect, he or she can take steps to avoid committing that bias when making a trade for liquidity reasons. If an investor is aware that he or she may be prone to overcondence, he or she can take a step back before making an important investment decision. Not all behavioural biases can necessarily be avoided, though. To the extent that someone is prone to seasonal uctuations in their risk tolerance, its very difficult to tie ones hands behind ones back and make an investment decision that runs counter to ones tolerance to risk. But awareness is power. To continue on the topic of risk, one of your recent papers discusses the equity premium. What is it, and why is it important? The equity premium is the amount of compensation that an investor demands in order to be compelled to hold risky stock instead of perfectly safe, risk-free assets like government bonds. This quantity has been the focus of research for many years. A lot of studies estimate an equity premium as high as six per cent, even though nancial theory suggests it should be a lower number, closer to one per cent. The interesting thing about measuring the quantity is that its been very difcult to measure precisely. My work on estimating the premium has been an attempt to come up with a more precise estimate by looking at a wide range of economic quantities over the last fty years. Weve been able to narrow the precision of the estimate to within plus or minus fty basis points of three and a half per cent, which is interesting, because this gets at the reward that investors earn for holding risky stock. The amount of compensation an investor demands for bearing risk is a very personal characteristic. Risk tolerance varies from individual to individual, but there are also generalizations. Women tend to be more risk averse than men; as we age we tend to become less risk tolerant; and married people are less risk tolerant than single people. Its fascinating to see the interplay of all these players in the market.
Lisa Kramer is an assistant professor of Finance at the Rotman School of
Management. She is an ad hoc reviewer for a variety of publications, including American Economic Review, Canadian Journal of Economics, and Global Finance Journal.
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Questions for:
Harrison Schmitt
Q
&A
The former astronaut and senator discusses the emerging markets demand for energy; the allure of helium-3, and the potential benets of lunar mining.
You have said that the immediate challenge to civilizations global energy future lies in meeting the needs of the 12 billion earthlings that will be on our planet by 2050. Please explain. Current per capital use of energy is equivalent to about 12 barrels of oil per year, for a global total of 72 billion barrels of oil per year. If you look to the not-too-distant future, to the middle of the 21st century, at least an eight-fold increase in annual production will be required and thats a conservative estimate. It includes a two-fold increase to account for the increase in the worlds population from 6.3 to 12 billion, along with a four-fold increase to meet the aspirations of the fourfths of the worlds peoples whose standards of living are far below those in developed countries. Even an eight-fold increase would not bring the rest of the world to the current average per capital use in the U.S.; its more likely that we will need 10 or 12 times more energy than we use today to meet the needs and aspirations of the global population without even
considering the demands of new technologies and climate change mitigation. So obviously, were going to need a wide variety of sources of energy to meet these needs.
Describe how China and Indias explosive growth affects global demand. Due to their huge populations and accelerated growth, these two countries will have an inordinate inuence on the future of total global demand. The contribution of the total standard of living aspirations to future global growth in per capital electricity demand can only be roughly estimated today; however, if it is as great as it has been for South Korea and other countries that have successfully entered the modern industrialized world, then they will need at least a factor of four over what is being produced today to meet their aspirations and it may even be higher. Another source for growth in electricity demand will come from the need to counter the adverse effects of climate change. Independent of human inuence, climate change has appeared as gradual warming over several centuries, as rapid cooling over a decade or so, or as rapid oscillations over a century or two. The warming cycle we are experiencing right now is, in my opinion, part of a natural cycle that has been happening since the Little Ice Age in Europe in the 1400s that followed an unusually warm period. All you have to do is read the personal accounts of what people were going through during the Revolutionary War period, and youll see what that era was like, even up into the 1700s and 1800s. Weve only gradually been coming out of that. We have no ability as yet to reliably predict which way the inevitable change will occur; the only thing we can predict is that more electricity and energy in general will be required to mitigate the adverse consequences of such changes, whether from warming or cooling. The bottom line is, we need as many alternative energy sources as are reasonable from an engineering, scientic, and economic perspective. No alternative energy source will be viable unless it can compete with the most abundant energy source at that point in time, and right now, that is coal. Its conceivable that it might gradually change to nuclear ssion power which currently produces about 20 per cent of all electricity in the U.S. But nuclear power comes with a bundle of challenges from political, health and safety issues to being an attractive target for terrorists. So the door is open to a wider variety of energy sources. You believe it is not prudent to depend on fossil fuels such as crude oil, natural gas, and coal to meet the increasing global demand. What are the key issues here?
First of all, liquid fossil fuels so called portable fuels will be gradually depleted. Many observers believe that total production of these sources will peak, due to natural geological limitations, between 2010 and 2030: crude oil will peak rst, natural gas next, and coal much later. I dont happen to believe they will be depleted nearly as fast as some people would argue, but they will definitely be depleted. In the near term, rising prices will increase supply as well as improve the market for alternatives. New sources of energy can help to combat the dependence of the worlds democracies on unstable sources of energy supply, over which there exists little or no market control of prices. So thats one aspect of it. Another is that by using such energy sources, we are releasing quantities of carbon into the surface environment
Its likely that we will need 10 or 12 times more energy than we use today to meet the needs and aspirations of the global population.
of the earth. The question is, how much of that carbon is going to stay within the atmosphere, and how much is going to be xed within the oceans and the earths plant life -- and what will the long-term effects be? And while that is still an open question, it is clearly not prudent to continue to add carbon to the environment beyond what nature intended.
You advocate helium-3 as a promising source of energy. What is it, and where can it be found? Helium-3 is a natural isotope of helium-4, the familiar birthdayballoon gas, and it is a relatively new entrant into the 21st century energy sweepstakes. Small amounts of helium-3 can be found on the earth from primordial sources sources that relate back to the beginnings of the solar system; and it can be found in amounts important for research (but not for power production) through the decay of articial tridium which is produced for nuclear weapons. Every 13 years or so, the nuclear weapons of the U.S. and the former Soviet Union are cleaned up, and helium-3 is extracted and used for other purposes, such as engineering research on power systems. But if youre going to have a power economy that includes signicant amounts of helium-3, the only available source within reach of the earth right now is the Moon.
Governments can create portions of the infrastructure in particular the transportation infrastructure to get us to the Moon, and then leave it to the private sector to deal with extracting the resources.
Helium-3 comes to the airless Moon as part of the solar wind particles, mostly hydrogen nuclei, that stream out from the sun due to fusion reactions that take place in our star. And because the Moon has no atmosphere like the earth does, those particles impact the surface of the Moon directly. The portion of the particles that are helium-3 a very small portion gradually accumulate in the lunar soil (regolith) over time. Most of the solar wind is comprised of hydrogen actually, protons, which is a hydrogen nucleus, but about four per cent of it is helium, and about 1/2500th of that is helium-3. That doesnt sound like much, but when you have four billion years-worth accumulated, it becomes a potentially viable economic resource.
If helium-3 were transported to the earth, what could it be used for? The most important economic application would be fusion power. Helium-3 is an ideal fuel for fusion reactors, primarily because it can be used in reactors that dont cost very much relative to the kind of fusion research that is ongoing today, which depends on hydrogen isotopes. It also produces no radioactive waste, and one of the most important aspects of it is that it allows you to convert fusion products (protons) directly into electricity, without going through a heat cycle. The heat cycle is what destroys the efciency of any conventional fossil fuel or nuclear power plant, driving it down to about a 35 to 40 per cent efciency rate. With helium-3s direct conversion, you can potentially have up to 70 per cent or more efciency with the direct conversion of energy to electricity. What has to happen before lunar mining and processing can occur? As with any mining initiative, you need investment capital before you can begin to locate, produce and ship the resource. In my book, I lay out a very general business plan and a rational for this, and try to frame the overall capital cost that would be required. It is conceivable that governments can create portions of the infrastructure in particular the transportation infrastructure to get us to the Moon, and then leave it to the
private sector to deal with extracting the resources. But in the book I focus on this as an entirely private-sector initiative. Im currently working with my colleagues at the University of Wisconsin, seeking capital to support the research program that is underway there. Their work has been quite successful in generating very low levels of power via helium-3. Im also trying to interest larger potential investors such as energy companies and entrepreneurs, getting them to consider investing in turning this into a viable energy source here on earth. Thats no easy task, even though the amounts of capital needed are much smaller than people tend to think of as necessary for space projects. In our judgment, the amount required is in the ballpark of what it took to build the Alaska pipeline and other comparable projects. These levels of investments are made not routinely, but on occasion, and thats about the level of investment, approximately $15 billion, it would take, over a 15-to-20 year period, to turn helium-3 into a viable option for the production of electricity here on earth.
As one of the few earthlings to have walked on the moon, do you nd it ironic that you have become so involved in encouraging this return to the moon? I cant take credit for this idea it came from the University of Wisconsin, from a team led primarily by Dean Gerald Kulcinski of the Fusion Technology Institute. They just asked me to become their consulting economic geologist, so I took on that role and have consulted with them since 1986, and subsequently became much more involved with the business side of the equation. But theres no question that its a logical extension of my work as an astronaut and lunar scientist. The Wisconsin folks have discovered something in the samples brought from the moon that is potentially of great economic and human benet: Lunar helium-3 fusion power systems could become part of an indenitely viable portfolio of clean sources for global electrical power generation and process heat, alongside Generation IV nuclear ssion power plants, clean coal-burning plants, and solar-power technologies (including wind power.) Im just thrilled to be involved in it.
Harrison Schmitt is the last human being to have set foot on the Moon, and
the author of Return to the Moon: Exploration, Enterprise and Energy in the Human Settlement of Space (Praxis, 2006). As an Apollo 17 astronaut, he spent three days in December 1972 on the lunar surface. He spent 10 years as an astronaut with NASA, and six years as a U.S. Senator for New Mexico. He currently chairs the NASA Advisory Council and continues his work as a consultant, professor, and advocate for space-based private enterprise.
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Point of View:
Amy Edmondson and Mark Cannon
PUTTING FAILURE TO WORK

How Great Organizations Learn from Failure to Improve and Innovate
The idea that people and the organizations in which they work should learn from failure has great popular support and seems obvious. However, organizations that systematically and effectively learn from failure are very rare. Large and well-publicized organizational failures such as NASAs Columbia and Challenger shuttle tragedies, and the Parmelat and Enron accounting scandals, argue for the necessity of learning from failure. Why do organizations fail to learn from failure? Our research suggests that an important part of most organizations inability to learn from failure is a lack of attention to small, everyday organizational failures. Small failures are often the early warning signs which, if detected and addressed, may be the key to avoiding catastrophic failure in the future. When small failures are not identied widely, discussed and analyzed, it is very difcult for larger failures to be prevented. Barriers to Learning from Large and Small Failures While learning from failure is a hallmark of innovative companies, even companies that invest signicant time and effort into becoming learning-from-failure organizations struggle when it comes to the mindset and day-to-day activities of learning from failure. To understand the barriers to learning from failure, both the technical and social attributes of organizations should be considered. Barriers embedded in technical systems Technical barriers are present when individuals lack the basic scientic know how to effectively engage in the analytical and scientic aspects of learning from failure, including appropriate use of statistical analyses and other tools, or when technologies are particularly difcult to understand and diagnose. Relying exclusively on common sense, limitations in human intuition and sense-making can lead people to draw false conclusions, inhibiting both individual and collective learning. Barriers embedded in social systems Organizations are made up of individual, psychologicallycomplex human beings, and most individuals experience strong negative feelings in response to their own failures. Further, individual employees may incur tangible costs if their actions create unfavorable impressions on people who inuence decisions regarding promotions, raises or desirable project assignments. These potent barriers are all but hardwired into social systems. Thus, not only do few organizations systematically capture failures lessons, most managers lack a clear understanding of what a proactive process of learning from failure looks like. Following are three key steps to learning from failure: 1. Identify failure Proactive and timely identication of failures is an obvious and essential first step in the process of learning from them.
Overcoming the psychological barriers to identifying failure requires courage to face the unpleasant truth. Organizational leaders must take the initiative to develop systems and procedures that make available the data necessary to identify and learn from failure. To cite one example, Electricit de France, which operates 57 nuclear power plants, tracks each plant for anything even slightly out of the ordinary and has a policy of quickly investigating and publicly reporting any anomalies throughout the entire system so that the whole system can learn. Feedback-seeking is an effective way of proactively identifying many types of failures. Feedback from customers, employees and other sources can expose failures, including communication breakdowns as well as failure to meet goals or satisfy customer requirements. General Electric and United Parcel Service are two organizations that proactively seek data that will help them identify failures. GE places an 800 number directly on each of its products; its call answer centre is open 24 hours a day, 365 days a year, receiving approximately three million customer calls a year. UPS has built in a half hour per week to the schedule of each of its drivers for receiving feedback and answering questions. These simple techniques exemplify methods of identifying failure in a timely way so that the organizations can learn, respond quickly and retain customers.
2. Analyze failure Organizations cannot learn from failure unless thoughtful analysis and discussion of it occurs. An example of effective analysis of failure is found in the meticulous and painstaking analysis that goes into understanding the crash of an airliner. Hundreds of hours may go into gathering and analyzing data to sort out exactly what happened and what can be learned. Compare this kind of analysis to what takes place in most organizations after a failure. Formal processes or forums for discussing, analyzing and applying the lessons of failure are needed to ensure that effective analysis and learning from failure occurs. After experiencing failure, people typically attribute too much blame to other people and forces beyond our control. If this tendency goes unchecked, it reduces an organizations ability to dig out the key learning that could come from the experience. To reduce the potential for conict and for differences to get out of hand, people skilled in interpersonal or group processes can be used to keep the process productive. Such expert facilitators may bring new perspectives and insights that deepen the analysis and help to counteract self-serving biases that may colour the perceptions of those most directly involved in the failure. 3. Experiment The third process for learning from failure is perhaps both the least obvious and the most provocative. A handful of exceptional organizations not only seek to identify and analyze failures, they seek to generate them for the express purpose of learning and innovating. This means they devote some portion
of their collective energy to deliberate experimentation, trying new things out to find out what works and what doesnt. Despite the increased rate of failure that accompanies deliberate experimentation, organizations that experiment effectively actually are likely to be more innovative, productive and successful than those that do not take such risks. Consider the example of the inuential, award-winning design rm IDEO, which promotes internal experimentation through such slogans such as: Fail often in order to succeed sooner, and enlightened trial-and-error succeeds over the planning of the lone genius. These statements are accompanied by frequent small experiments, and much good humour about the associated failures. The technology company 3M has earned a reputation for successful product innovation by encouraging deliberate experimentation and by cultivating a culture that is tolerant and even rewarding of failures. Failures are seen as a necessary step in a larger process of developing successful, innovative products. Apocryphal stories such as Arthur Fry and the failed super-adhesive that spawned the Post-it Note industry are spread far and wide, both within and outside of the company. Setting goals, such as that of having 25 per cent of a divisions revenues come from products introduced within the last ve years, means that divisions must be actively experimenting to develop new products.
Overcoming Organizational Barriers Although barriers to a systematic process of learning from failure are deep rooted and numerous, by breaking this process down into component activities and by focusing rst on small failures rather than catastrophic ones organizations and their managers can minimize the inherently threatening nature of failure to gain experience and momentum in this learning process. Following are six types of organizational barriers that must be overcome to put failure to work. 1. Technical barriers to identifying failure Organizations are complex systems, which can make small (and sometimes large) failures difcult to detect. If a system has many complex parts and interactions, deviations from the expected and desired can be ambiguous. The Columbia shuttles initial failure exemplies this phenomenon; it was not clear to everyone involved until much later that foam strikes should indeed be identied as failures. Enhancing the ability of individuals to identify (especially small) failures often requires training. Fortunately, overcoming technical barriers does not require that all employees have the required technical skill themselves. The judicious use of a few well-placed technical experts and systems thinkers may be enough to trigger more reliable identication of failure. 2. Technical barriers to analyzing failure Most people have a propensity not to recognize that they lack complete information, or that their analysis is not rigorous, and thus leap quickly to questionable conclusions, while
Failure must be viewed not as a problematic aberration that should never occur, but rather than as an inevitable aspect of operating in a complex and changing world.
remaining condent that they are correct. Extracting failures lessons is not always straightforward, creating a need for training in skills and techniques for systematic analysis of complex organizational data.
3. Technical barriers to effective experimentation
rare. Managers thus need to align incentives and to offer resources to promote and facilitate effective experimentation. Those who experiment intelligently themselves, and publicize both failures and successes, demonstrate both value of these activities and help others see that the ideal of learning from failure in this organization is more than just talk.
Putting Failure to Work Failure must be viewed not as a problematic aberration that should never occur, but rather than as an inevitable aspect of operating in a complex and changing world. This is of course not to say leaders should encourage people to make mistakes, but rather to acknowledge that failures are inevitable and that the best thing to do is to learn as much as possible, especially from small failures, so as to make larger ones less likely. Organizational scholar Sim Sitkin has identied ve characteristics of intelligent failures: 1. they result from thoughtfully-planned actions that 2. have uncertain outcomes and 3. are of modest scale; 4. are executed and responded to with alacrity, and 5. take place in domains that are familiar enough to permit effective learning.
To produce valuable learning, experiments must be designed effectively. Yet designing experiments for learning requires careful thought as to what kinds of data will be collected and how results of the experiment will be assessed. It is not necessary to make all employees experts in experimental methodology; it is more important to know when help is needed from (outside or company) experts with sophisticated skills.
4. Social barriers to identifying failure To promote timely identication of failure, organizations must avoid shooting the messenger, and instead put constructive incentives for speaking up in place. People must feel able to speak up about the failures -- both clear and ambiguous -- of which they are aware. To do this, leaders need to cultivate an atmosphere of psychological safety to mitigate risks to selfesteem and others impressions. Developing psychological safety begins with the leader modeling the desired behaviours. That is, leaders should visibly engage in the behaviours that they wish to encourage subordinates and peers to enact. 5. Social barriers to analyzing failure Effective analysis of failure requires both time and space for analysis, along with skill in managing the conicting perspectives that may emerge. Some organizations, like the military, set aside time for After-Action Reviews, while hospitals use Morbidity and Mortality (M&M) conferences to discuss signicant mistakes or unexpected patient deaths, as a forum for identifying, discussing and learning from failures. In addition to putting such structures in place, leaders need to involve people with diverse perspectives and skills in order to generate deeper learning. Organizations can develop or hire skilled facilitators, or train their own managers to be more effective in generating learning from the heated discussions that are often produced when analyzing failure. 6. Social barriers to experimentation As long as incentives are inconsistent with espoused values advocating learning from failure, true experimentation will be
Examples of unintelligent failure include making the same mistake over and over again, failing due to carelessness, or conducting a poorly-designed experiment that would not produce helpful learning. Managers need to create an environment in which they and their employees are open to putting aside their self-protective defenses, and responding instead with curiosity and a desire to learn from failure. We do not underestimate the challenge of tackling the psychological and interpersonal barriers to this organizational-learning process. As human beings, we are socialized to distance ourselves from failures. Reframing failure from something associated with shame and weakness to something associated with risk, uncertainty and improvement is a critical rst step in the learning journey.
Amy Edmondson is the Novartis Professor of Leadership and Management and chair of Doctoral Programs at Harvard Business School. Mark Cannon is
an assistant professor of Educational Leadership at Vanderbilt University. This is a summary of a paper that appeared in the Long Range Planning Journal. For a copy of the full paper, e-mail christen@rotman.utoronto.ca
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Questions for:
Kathleen Carley
Q
&A
The Carnegie-Mellon professor and scientist talks about scale-modeling crises, our bi-modal workforce, and how software can help ght terrorism.
Interview by Stephen Watt
Youve dedicated your career to studying the shadow network that underlies organizations as disparate as Enron and al-Qaeda. What is network analysis, and what makes it such an exciting eld? Network analysis is the science of relations. Its the study of nodes, such as people or organizations, groups or ideas, and the ties or relations among them. Once youve established a set of nodes and the ties among them, you can measure and monitor changes in the network. This is exciting as networks underlie all aspects of life, from family to work, to civil infrastructure and alliance formation among countries. Networks constrain and enable all your behaviour. With computers, we can unlock their secrets and so understand more about ourselves, and how to create changes in the world. With my team of graduate students and research staff, Ive used networks to study many kinds of groups, including open source software teams, terrorists, hospital critical care units
and military units. For example, we studied the X teams at NASA, which are high-end design teams that design space missions. Using network techniques, we discovered that different types of leadership were needed at different parts of the project to achieve high performance. We used the same techniques to study the Enron e-mail data that was collected at the behest of the courts and released publicly. We were particularly interested in how the structure of the way people talk in organizations reect massive changes in their culture, and how organizations respond to events like bankruptcy or a change of CEOs. Weve looked at terrorist groups like al-Qaeda, to see how their networks evolve and change over time, how they can be disrupted, and where their strengths and vulnerabilities lie. Weve found that al-Qaeda is a cellular network that is difcult to disrupt, and that its overall structure has become leaner over time.
Much of your research revolves around risk, and generating models to predict the impact of catastrophes. Tell me about BioWar, for example. BioWar is a city-level computer model of the impact of biological or chemical events on people. Think of it as Sim City on steroids. It uses multi-agent and social network technology, which means it follows virtual people, or agents, as they move through their lives, going to work or school, visiting the doctor or an emergency room, purchasing over-the-counter and prescription drugs, and so on. Weve set up the model to take downloaded census and school district data as its input, so that the virtual city has the same characteristics as the real city. Once we build the virtual city, we let our articial agents carry out their activities, and BioWar reports on their progress in four hour increments. You learn where the agents are and what theyre doing, and on a larger scale, the percentage of the population that has come down with the disease, the number of purchases of a particular medicine, and so on. So far we have modeled ve cities, including Pittsburgh, 62 diseases, including SARS and pandemic u, and two chemical events. The information generated is very detailed. Weve shared our work with other research groups that are developing tools to determine whether or not theres been an anomaly in real data, and need something on which to test their data. We generate data thats as detailed as the real world. You have done research for the U.S. military on covert networks such as al-Qaeda and Hamas. What challenges do commanders, politicians and intelligence agents face when trying to understand and contain the threat posed by such groups?
There are a huge number of challenges. The rst is that such analysts and leaders need to understand another culture, and often multiple other cultures. They need to understand why people behave the way they do, and they need to do so very rapidly. Unfortunately, we do not have large data sets built up on every culture in the world. Another challenge is that in todays world, were moving toward using non-military solutions to problems. Were asking our military, politicians and intelligence agents to consider economic, diplomatic, social and religious solutions, not just military ones. That makes the space of solutions really complex. There are a lot of factors that have to be considered. Most people arent good at thinking in one space, let alone many at once, which is what were asking them to do. Furthermore, it is increasingly clear that the U.S. can no longer proceed unilaterally, but must learn to work with allies and others. We need to gure out what the world as a collective needs, and move together in a direction that makes sense. Doing so is complicated. Finally, the data thats available, especially on covert networks, is incomplete and changing constantly. These groups are not static: they are constantly hiding information and using aliases. As a result, we are usually presented with messy and evolving data that most of our tools and technologies are unable to handle properly. Were used to thinking of an enemy thats a single state and thats geographically contained, but thats just not the case any more. All of these challenges require skills that the military has never had before.
To switch topics to the corporate world, downsizing is a popular option in a business climate where doing more with less and optimizing ROI are valued. Why should companies be careful about who they let go? Do similar risks exist when people retire? Y es, the risks when people retire and when a company downsizes are similar. In either case, the company loses not just the person, but also their skills and knowledge. Most people, in the course of their careers, develop quite specialized expertise. In some cases, its old information, like how to x a car from the 60s, but other times its relevant but highly-specialized information, like the details of a particular chemical process. The problem with downsizing is that when you get rid of people, you also get rid of their specialized knowledge. Companies will later realize, We needed that expertise, but what are their options? They can hire the person back, perhaps as a consultant, but that might cost twice as much, and the employee may have meanwhile left for another workplace.
Maybe we need to change our view of what privacy really means, and decide when privacy is worth the cost.
the fact is its not, at least in the U.S. When a company starts using their e-mail for corporate reasons, workers tend to get very incensed, even though the information is legally not theirs to control. Once a company has collected that kind of e-mail data, or even newspaper data from the public domain, it can use a network model in which it has a full composite view of its employees, their performance and knowledge, and how they compare with others. Some workers might say, If you can know all this about me, this infringes upon me personally. However, having that data can support better performance evaluations, help design more effective teams, enable people to more rapidly build social expertise and provide greater guidance into the core capabilities of the company. Whether or not this information presents an infringement, perhaps what is needed are technologies to better anonymize, privatize or sanitize the data. The issues surrounding networks and privacy are central to an important philosophical and political debate that we need to have. Maybe we need to change our view of what privacy really means, and decide when privacy is worth the cost.
Whats next on your research agenda? I run a 30-person group thats composed of half graduate students and half full-time research staff, so we have a lot going on. Were currently studying how networks evolve and change over time by approaching these networks theoretically and examining actual adversarial groups. Were also looking at streaming data to see how we can adjust the kinds of tools we have now to handle constant inows of information. Another project involves work on multi-scale modeling. Take BioWar, for example. Right now, all the agents are virtual individuals but what happens if we add virtual organizations, such as a model of the Centre for Disease Control, or of various hospitals? Multi-scale modeling allows for the co-existence and interaction of both people and organizations. Were also looking at the Avian u and its impact on cities, as well as the impact of other pandemic inuenza viruses such as SARS. We can model diseases very quickly because we do so at the symptom level. Weve already modeled 62 diseases in ve American cities. It all adds up to some very challenging and fascinating work.
Kathleen Carley is a professor at the Institute for Software Research
When you downsize or when people retire, the social network in the company is also disrupted. Consider the difference between formal and informal organizations. The formal organization is the traditional organizational chart: who reports to whom, who has authority over whom, and so on. The informal organization involves who you go to for help and advice, who really tells you what to do in your job, and so on. When a company downsizes or its employees retire, it ends up with a completely different informal chain of command. The transactive memory of who knows who knows what is lost. As such, employees no longer know and have difficulty finding out whom to go to for help. The social expertise is lost. Such a loss is very costly and takes a long time to rebuild. At many U.S. companies, because of demographic factors such as the Baby Boom, there is a kind of bi-modal work force, with a lot of people nearing retirement and a lot of people under 30, and not many employees in the middle. With downsizing and retirements, companies lose the technical and social expertise without having a training program in place to train the newer workers, or the middle management needed for training and helping people along. Companies as a result become siloed. Two parts of the company may end up building the same software, bidding against each other on contracts, reinventing the same chemical processes because theyre unaware that other people in their company have the expertise to do the same. With a bi-modal workforce, as the older generation leaves, those who remain have not been there long enough to have the transactional knowledge of whos doing what to develop.
To analyze the social fabric of a particular company, network science must draw upon data such as employee e-mails, phone calls and other forms of personal interaction. At what point do privacy issues become a concern? There are two kinds of privacy issues. One is the issue of real privacy, and the other is the perception of privacy. On the perception end, most people dont realize that when they send a message from their corporate account, the company owns the e-mail. Many people assume its private communication, when
International in the School of Computer Science at Carnegie Mellon University. She is the director of the Center for Computational Analysis of Social and Organizational Systems (CASOS), and co-author of Designing Stress-Resistant Organizations: Computational Theorizing and Crisis Applications (Kluwer, 2003).
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Faculty Focus:
Laurence Booth
FINANCIAL PLANNING
WITH RISK
Key to a sound financial plan is knowing whether current decisions allow an individual to meet his or her specific objectives. For example, given an objective such as, retire at 65 with 70 per cent of pre- retirement income, it is the job of the nancial planner to devise a suitable strategy. One important part of the nancial planners tool kit is to tinker with an individuals investment strategy. It is well known, for example, that riskier investments such as common shares tend to earn higher rates of return than lower-risk investments like treasury bills and guaranteed investment certicates. If a key objective such as 70 at 65 cannot be met with a conservative investment strategy, then one alternative is to be more aggressive and move more of an individuals portfolio into common shares. However, moving the portfolio balance towards common equities does not come without cost. If retirement problems could be solved that easily, wed all be 100 per cent in common equities. The problem is that unlike GICs and Canada bonds, the return on equities is very difcult to predict and highly uncertain: just ask anyone who bought an income trust before Federal Finance Minister Jim Flaherty changed the tax rules on Halloween, 2006. Considering the positive aspects of equities in a nancial plan the higher return without the negative aspects (i.e. the risk) is misleading. How to incorporate risk into a simple nancial plan? As far as the planner is concerned, the key output is a more comprehensive view of how likely it is that the retirement goals will be met. The Simple Plan We will start with the simplest case. The client lets call him Frank is 35 years old with $50,000 in his portfolio. Frank, who earns $60,000 a year and wants to retire at age 65, comes to a nancial planner for advice. Looking up Franks age in mortality tables, a nancial planner might expect Frank to live to be 76 years old. The result is a simple present value problem: Frank will work and save for 30 years and live in retirement for 11 years. With two per cent ination and no real income increases, Franks salary would be $108,682 in his last year of employment. Taking 70 per cent of pre-retirement income as the objective, the nancial planner would estimate that Frank needs $77,599 in his 66th year, an amount that will then increase every year by the two per cent ination rate. Franks retirement objectives can be solved in the normal way. First, we compound the $50,000 portfolio forward to retirement. Second, we evaluate whether it is sufcient to support his 11 years of retirement. At the 5.5 per cent Canada bond return, the $50,000 will be compound forward to $249,198 at retirement. This portfolio value can then be used to buy an 11year, inflation-protected annuity, which will keep Franks retirement income constant in real terms. Given his portfolio, Frank will have an initial retirement income of $28,132, and in year 11, his last draw-down will exhaust his capital. One of the suggestions that a nancial planner might make is that Franks investment strategy is too conservative. Equities outperform bonds by three to four per cent over the long term, so suppose the planner uses nine per cent for a long run equity
When we introduce risk, we are simply recognizing that future investment returns are unpredictable.
return. In this case the $50,000 portfolio would compound to $633,384, an eye popping $414,186 more than what would be achieved by investing in Canada bonds. More to the point, if Frank collapses this $633,384 into an ination-indexed annuity at retirement, it would generate $74,889 in his rst year of retirement, for an income drop of only 32 per cent very close to the target 30 per cent. He would only need to nd another $1,809 to invest today to meet his retirement objectives. By changing from bonds to equity to get a higher expected rate of return, we appear meet Franks retirement goals with very little current or future sacrice. However, the 100 per cent equity strategy is risky. Suppose Frank adopts a balanced portfolio: 50 per cent common equities and 50 per cent long term bonds. In this case, the expected return drops to 7.25 per cent, so that on retirement Frank will only have $408,215 less than with 100 per cent common equities, but still an improvement on the $249,198 he would have with 100 per cent bonds. In this case his income would drop by 58 per cent on retirement, with a shortfall of $31,516 in his rst year. To meet this deciency, Frank would have to nd another $34,194 to add to his current portfolio. The obvious way to meet this deficiency is through a planned savings program. If Frank saves 3.5 per cent of his annual income, at retirement he will have a nest egg of $667,415, which generates a rst-year retirement income of $75,344. Although this is below the original target retirement income of $77,599, his standard of living has actually declined throughout his 30-year working life, since 3.5 per cent of his income has been saved each year.
Figure 1
FRANKS DATA Age Income Portfolio Retire at Income Goal 35 $60,000 $50,000 65 70% PLANNERS DATA Life Expectancy Ination Bond Return Equity Return Equity Risk 76 2% 5.5% 9% 18 %
I prefer to dene retirement living standards in terms of disposable income. In this case, prior to retirement, Franks disposable income was not $108,682, since 3.5 per cent or $3,804 was saved. As a result, the 30 per cent target should be in terms of his disposable income of $104,878, which reduces his target retirement income to $74,883. On this basis there is an income drop of only 29 per cent. These results are summarized in the following table: Meeting an individuals retirement objectives in a balanced way through planned savings and reasonable investment choices is a prudent strategy. However, this qualitative approach leaves key questions unanswered, such as how likely is it that the goals will be met? or how likely is it that this strategy will outperform the 100 per cent Canada bonds strategy? To answer these questions, risk has to be introduced into the picture in a meaningful way.
Figure 2
STRATEGY 100 % Bonds 100% Equities Balanced Balanced + 3.5% savings TARGET INCOME $77,599 $77,599 $74,883 $74,833 EXPECTED INCOME $28,132 $74,889 $46,083 $75,344 EXPECTED INCOME DROP PER CENT 74% 32% 58% 29% EXPECTED INCOME SHORTFALL $49,467 $2,709 $31,515 Extra $461 WEALTH SHORTFALL $87,920 $1,809 $34,194 Extra $500
A Simple Plan with Risky Investments When we introduce risk, we are simply recognizing that future investment returns are unpredictable. However, we can estimate this unpredictability, since we have data on capital market returns in Canada back to 1922, and in the U.S. and UK, even earlier. One way is to simply look at the maximum and minimum annual returns from holding common equities. In Canada, the maximum return was 51.63 per cent in 1933, and the minimum was -32.96 per cent in 1931. In more recent times, in 1979 there was a 44.8 per cent gain, and in 1974 a 25.9 per cent drop. Either way, maximum gains and losses of around plus or minus 40 per cent from an expected return have been realized in the past. Although the extreme events of 1931 and 1933 are unlikely to recur, they should be taken into account by nancial planners. Of the many ways of incorporating risk, the easiest and most exible technique is what is known as Monte Carlo simulation, which involves replicating all of the possible events that can occur. For example, there is about a one per cent chance that the equity market will have a 1931-style correction of -33 per cent, or a 1933 style boom of 51 per cent. To include these possibilities, we sample the investment returns that might occur each year over Franks investment horizon. Each year, 1,000 possible returns are drawn from a normal distribution with the same average return and variability as we have observed for the Canadian equity market. This is repeated for each year of Franks investment horizon, so that we can create 1,000 possible terminal values for his portfolio prior to retirement. The advantage of Monte Carlo simulation is that it provides a distribution of all the possible portfolio values at retirement. This then allows us to consider how likely is it that Franks portfolio will actually earn the nine per cent expected equity return. If Frank expects to be able to meet his retirement goals with a 100 per cent equity plan, what is the actual likelihood of being able to do so? An intuitive way of answering this is to see how many of the 1,000 possible futures result in Frank meeting his retirement objectives. In this case, the answer is 302, so Frank only has a 30 per cent chance (302 out of 1,000) of meeting his retirement objectives. The problem is that just knowing that equities are expected to earn nine per cent and Canada bonds 5.5 per cent is not enough to solve Franks retirement problems. The nancial planner has to incorporate risk into his investment advice. Frank may say, I need to be 70 per cent certain of getting 70 per cent of my pre-retirement income at 65. This extends the 70 at 65 to 70 per cent chance of 70 at 65. With this criterion, the 100 per cent equity strategy fails, since there is only a 30 per cent chance of Frank getting 70 per cent of his income at retirement. There are several ways of handling this income risk. One is by changing the optimal portfolio mix in combination with the annual savings level until the desired 70 per cent comfort level is reached (the solution discussed earlier). For example, annual
savings of seven per cent plus a 100 per cent equity strategy will give a 66 per cent chance of meeting the retirement objective. For a very conservative investor, the portfolio mix could be shifted zero per cent into equities, while maintaining the seven per cent savings rate. This results in an expected retirement income of $71,969, which is an income drop of 30.19 per cent at retirement, which pretty much hits the 70 per cent income target. However, the seven per cent savings rate is pretty high for most people. Drop it to ve per cent and move the portfolio 50 per cent into equities, and the expected retirement income goes to $87,884. This exceeds the target income drop of 30 per cent, but there is now a 50 per cent chance of meeting the retirement objectives. For a young person like Frank, with plenty of time to retool his plan as he sees the performance of his investment portfolio take shape, this may make sense. These alternatives are summarized below:
Figure 3
STRATEGY EXPECTED INCOME $74,889 $154,038 $71,969 $87,884 EXPECTED INCOME DROP 32.5 % +49.4% 30.19% 16.5% CHANCE OF GETTING 70% 30% 66% 0% 50% CHANCE OF BEATING BONDS 71% 66% N/A 68%
100 % 100% + 7% 0% + 7% 50% + 5%
Another important choice is the retirement date itself. The important point here is that what is possible needs to be discussed with the client: he or she has to make the decision to retire later, put up more cash or go for broke with an investment strategy tilted towards equities. In the end, there will be different solutions for different investors, but the decisions have to be suggested by a nancial planner who understands how risk affects investment returns, as well as the likelihood of achieving those returns.
Laurence Booth is the CIT Chair in Structured Finance and professor
of Finance at the Rotman School. The 2007 Financial Times ranking of global MBA programs ranked the Rotman Finance department in the top 10 (#7) worldwide.
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Point of View:
Lisa Bolton
Does Marketing Products as Remedies Create
GET OUT OF JAIL FREE CARDS?

The traditional approach to reducing risk focuses on the behaviour itself and encourages risk avoidance. For example, abstinence-type programs for drugs and sex are commonly targeted at teenagers. Just say no campaigns and similar public service messages typically emphasize the health risks of drug use or unprotected sex, and encourage people to avoid the risky behaviour. These risk messages serve as no entry signs, warning people to stay out of the problem domain. Another approach to reducing risk focuses on the promotion of remedies: products and services that offer solutions to, or ways of mitigating, risk by decreasing either its likelihood or its severity. There are two kinds of remedies: curative and preventive. Curative remedies counter the risk after it has been incurred by reducing the severity of the consequences. For example, nicotine-replacement products offer to help smokers quit, while debt consolidation loans claim to reduce the negative consequences of debt accumulation. In contrast, preventive remedies counter the risk before it is incurred. For example, condoms reduce the likelihood of sexual disease transmission, and uoride treatments reduce the likelihood of cavities. Both curative and preventive remedy messages target those at risk or in harms way and offer to take the risk out of risky behaviour. My colleagues and I recently set out to investigate the effects of remedy messages on risk perceptions and intentions to engage in risky behaviour. Our contention was that, from a public-policy perspective, the marketing activities of companies promoting branded remedies may, inadvertently, be undermining the risk-avoidance messages of social welfare agencies. Our Research Smoking is recognized as the number one cause of preventable disease and death in the United States, and the risk of addiction
and the fear of not being able to quit have been identied as drivers of smoking avoidance behaviours. This fear seems justied when the vast majority of smokers want to quit, but only a little more than two per cent successfully do so each year. How does current smoking behaviour affect consumer reactions to remedy messages for smoking cessation aids? Our rst experiment focused on a popular type of curative remedy for smoking: nicotine-replacement products. Indeed, media advertising expenditures for such products were $71 million in 2001. A remedy message for nicotine-replacement products is that quitting with the cessation aid is more effective than quitting unaided. Smoking-cessation aids should therefore reduce smoking behaviour. However, we predict that for regular smokers, the remedy may be interpreted as evidence that the risks of smoking are manageable, because consumers who want to quit can use the remedy to do so. As a result, the remedy should undermine risk perceptions and, in turn, decrease the intention to quit. Both smokers and non-smokers were recruited on a college campus at a popular location. Some participants were exposed to a remedy message containing information about the benets of a leading brand of inhaler as a smoking cessation aid. The noremedy message contained information about how to quit smoking unaided. After exposure to the message, the subjects recorded their thoughts in an open-ended, thought-listing task, and then answered a series of attitude and behavioural intention measures toward smoking. Of the 97 college students recruited to participate in the survey, 50 participants saw the no-remedy message, and 47 participants saw the remedy message. The remedys effectiveness was measured by comparing ratings for success and ease of quitting with the aid of a remedy to similar ratings for quitting unaided. As anticipated, participants rated quitting easier with a remedy aid under indirect questioning. Stop-smoking intentions rose with smoking frequency after exposure to the no-remedy message, but declined
with smoking frequency after exposure to the remedy message. A similar pattern of results was obtained under direct questioning, where smoking-cessation intentions declined as smoking frequency increased, especially after exposure to the remedy. Our rst experiment provides evidence that remedy messages undermine risk perceptions and increase risky behaviour intentions. This remedy message boomeranged on the very consumers smokers that it was intended to help. We conducted a follow-up eld study using another sample of consumers and another smoking remedy message to test the robustness of this nding. The sample consisted of clients of a Veterans Affairs Medical Center who were mailed surveys and received a nancial gift as an incentive to participate. A total of 99 individuals (46 who had never smoked and 53 smokers) returned the survey. The subjects were exposed to one of two advertisements for a remedy (a ctional non-prescription patch for smoking cessation) or a control product (a memory-boosting pill). The subjects rated the products effectiveness on a ve-point scale (with endpoints does not work and works very well), in addition to other adrelated items. The participants then indicated their intentions toward various behaviours on zero to ten scales, including the target behaviour captured by the phrase I will smoke cigarettes. For non-smokers, the ad message had no effect on smoking intentions; for smokers, the remedy message increased smoking intentions. Smokers traded away the potential safety gain of quitting with the aid of the remedy by planning to engage in more frequent smoking behaviour. This nding supports that of experiment 1 in another population sample using another remedy message. So far our investigation has centered on remedies for risky behaviour in the health domain (smoking). However, the effects of remedies seem generalizable to other domains, including nancial behaviours. In a third experiment, we investigate consumer reaction to debt consolidation loans as a function of credit card usage behaviour. Consumer behaviour in this domain is striking: only 37 per cent of American cardholders always pay the full amount owed, the average debt is $3,815, and credit card debt and bankruptcy lings are growing dramatically among young adults. Meanwhile, calls have been made to improve regulation of credit counselors who market debt-consolidation loans. How does problem status in this case, current credit card usage affect consumer reactions to remedy messages for debt consolidation loans? This experiment involved three groups: risk avoidance message, remedy message and none. The participants were staff and students recruited from two local universities and a hospital. A total of 72 subjects participated. The subjects rst responded to a set of questions regarding their credit card usage, including such phrases as: My credit cards are usually at their maximum credit limit and I always pay off my credit cards at the end of each month. A seven-point scale, using the endpoints strongly disagree and strongly agree, were designed to create an index reecting the level of risky
behaviour of the participants. In the remedy condition, the subjects were then exposed to an advertising message for a debt-consolidation program, advising how to manage, reduce and eliminate credit cardrelated debt. In the risk-avoidance condition, the participants were exposed to an advertising message for a nancial advisory program warning about the pitfalls of credit cards and the accumulation of debt. The ads were similar in layout, graphics and other aspects. The participants then responded to two ve-point scales rating the program featured in the ad: not very effective/very effective and a bad idea/a good idea. In the no-message control group, the participants were not exposed to either message. The subjects then responded to a series of questions concerning their risk perceptions and behavioural intentions. Our results suggest that boomerang effects may particularly arise from remedy messages. Compared to risk-avoidance messages, remedy messages seem inherently less threatening to consumers engaging in a risky behaviour, because the remedy itself offers a way to mitigate the threat. Remedy messages suggest that a get out of jail free card is available to take the risk out of risky behaviour, leading consumers to trade away the protective gain provided by the remedy through intentions to engage in more risky behaviour.
Conclusion Ironically, remedy messages boomerang on the very people they are intended to help most: those who are already engaging in the risky behaviour. This is a serious problem for individuals and at a societal level. In the marketplace, there is no nancial incentive for private rms to offer risk avoidance messages, such as just say no campaigns, unless they are linked to saleable products and services. From a moral hazard perspective, just as people may take less care of their health once they have health insurance, some consumers appear less risk averse when remedies are available. In the case of many remedies, consumers (not the seller) bear the cost of the negative consequences of riskier behaviour, as does society as a whole. If consumers avoided risky behaviours like smoking and incurring excessive debt, they would be better off, but rms that promote remedies for such behaviours would not. The incentive for marketers to over-sell the effectiveness of remedies using puffery and other devices, in conjunction with the miscalibration of consumers who seem to view remedies as get out of jail free cards, raises important ethical and possible regulatory issues regarding the marketing of remedies.
University of Toronto graduate Lisa Bolton (M.HSc 90) is an assistant professor of Marketing at the Wharton School of Business. The preceeding is based on a paper she wrote with Paul Bloom, a senior research scholar of Social Entrepreneurship and Marketing at Duke Universitys Fuqua School of Business, and Joel Cohen, a professor of Marketing at the University of Floridas Warrington College of Business. For a copy of the complete paper, e-mail christen@rotman.utoronto.ca
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Point of View:
John Adams
RISK MANAGEMENT
Its not rocket science its much more complicated
Lord Kelvin famously said: Anything that exists, exists in some quantity and can therefore be measured. This dictum sits challengingly alongside that of another famous scientist, Peter Medewar who observed: If politics is the art of the possible, research is the art of the soluble. Both are immensely practical-minded affairs. Good scientists study the most important problems they think they can solve [my emphasis]. It is, after all, their professional business to solve problems, not merely to grapple with them. A few years ago I participated in the World Federation of Scientists International Seminar on Terrorism. Most of the other participants were eminent scientists, and I found myself in a workshop entitled Cross-disciplinary challenges to the quantication of risk. Terrorism undoubtedly exists, and some of its consequences can be quantified. One can count the numbers killed and injured. With the help of insurance companies, one can have a stab at the monetary value of property destroyed and, for those with business continuity insurance, the value of business lost. But what units of measurement might be invoked to calculate the impact of the terror that pervades and distorts the daily life of someone living in Chechnya, or Palestine, or Darfur? Or the loss of civil liberties resulting from the anti-terrorism measures now being imposed around the world?
The problem becomes more difcult when one moves on to the challenge of quantifying the risk of terrorism. Risk is a word that refers to the future, which has no objective existence: the future exists only in the imagination. There are some risks for which science can provide useful guidance to the imagination. The risk that the sun will not rise tomorrow can be assigned a very low probability by science; and actuarial science can estimate with a high degree of condence that the number of people killed in road accidents in Britain next year will be 3,500, plus or minus a hundred or so. But these are predictions, not facts. Such predictions rest on assumptions; that tomorrow will be like yesterday; that next year will be like last year; and that future events can be foretold by reading the runes of the past. Sadly, the history of prediction contains many failures from those of stock market tipsters to those of vulcanologists seeking to predict eruptions, earthquakes and tsunamis. Type risk into an Internet search engine and you will get over 100 million hits. You need sample only a small fraction to discover many unnecessary and often acrimonious, arguments. Risk is a word that means different things to different people. It is a word that engenders a sense of urgency because it alludes to the probability of adverse, sometimes catastrophic, outcomes. Much of the acrimonious urgency that one uncovers in Googling risk stems from a lack of agreement about the meaning of the word. People are using the same word, to refer to different things, and shouting past each other.
Figure 1
Three Kinds of Risk
e.g chlorea: need a microscope to see it and a scientic training to understand
Perceived through Science
Perceived Directly
Virtual Risk
e.g. climbing a tree, riding a bike, driving a car
Scientists dont know or cannot agree: e.g. global warming, low-level radiation, pesticide residues, passive smoking, stock market...
Figure 1 is proffered in the hope of clearing away some unnecessary arguments. Directly-perceptible risks are dealt with using judgment a combination of instinct, intuition and experience. One does not undertake a formal, probabilistic, risk assessment before crossing the road. Crossing the road in the presence of trafc involves prediction based on judgment. One must judge vehicle speeds, the gaps in trafc, ones walking speed, and hope one gets it right, as most of us do most of the time. Most of the published literature on risk management falls into the category of risk perceived through science. Here one nds not only biological scientists in lab coats peering through microscopes, but physicists, chemists, engineers, doctors, statisticians, actuaries, epidemiologists and numerous other categories of scientist who have helped us to see risks that are invisible to the naked eye. Collectively, they have improved enormously our ability to manage risk as evidenced by the huge increase in average life spans that has coincided with the rise of science and technology. But where the science is inconclusive, we are thrown back on judgment, landing us in the realm of virtual risk. These risks are culturally constructed: people are liberated to argue from, and act upon, pre-established beliefs, convictions, prejudices and superstitions. Such risks may or may not be real, but they have real consequences. In the presence of virtual risk, what we believe depends on whom we believe, and whom we believe
depends on whom we trust. A participant at the aforementioned conference on terrorism was one of the worlds foremost experts on turbulence, notoriously the most intractable problem in science. In the mythology of physics, Werner Heisenberg is reported as saying: When I meet God, I am going to ask him two questions: Why relativity? And why turbulence? I really believe he will have an answer for the rst. I would trust the physicist I met at the conference to tell me the truth about turbulence, so far as he knew it. But the problems he is studying are simple compared to those of the risk manager, because the clouds do not react to what the weatherman or physicist says about them. We are all risk managers. Whether buying a house, crossing the road, or considering whether or not to have our child vaccinated, our decisions will be inuenced by our judgment about the behaviour of others, and theirs by their judgments about what we might do. The world of the risk manager is innitely reexive. In seeking to manage the risks in our lives, we are confronted by a form of turbulence unknown to natural science, in which every particle is trying to second guess the behaviour of every other: will the vendor accept less in a falling market? Will the approaching car yield the right of way? Will enough other parents opt for vaccination so that my child can enjoy the benets of herd immunity while avoiding the risks of vaccination? And, increasingly, if things go wrong, who might sue me? Or whom can I sue? The risk manager is dealing with particles with attitude. Another participant at the conference, alert to the strict limits of natural science in the face of such turbulence, warned that we were in danger of becoming the drunk looking for his keys, not in the dark where he dropped them, but under the lamp post where there was light by which to see. This caution prompted the re-drawing of Figure 1: Figure 2 is an attempt to highlight the strict limits to the ability of science to foretell the future.
Figure 2 In the area lit by the lamp of science, one nds risk management problems that are potentially soluble by science. Such problems are capable of clear definition relating cause to effect, and characterized by identiable statistical regularities. On the margins of this area one finds problems framed as hypotheses and methods of reasoning, such as Bayesian statistics, which guide the collection and analysis of further evidence. As the light grows dimmer, the ratio of speculation to evidence increases. In the outer darkness lurk unknown unknowns. Here lie problems with which, to use Medawars word, we are destined to grapple.
Figure 2 Risk Management: Where are the keys?
Perceived Through Science
Perceived Directly Virtual Risk
As the light of science has burned brighter, most of the world has become healthier and wealthier, and two signicant changes have occurred in the way in which we grapple with risk. We have become increasingly worried about more trivial risks, and the legal and regulatory environments in which we all must operate as individual risk managers have become more turbulent. As the likelihood of physical harm has decreased, the fear and sometimes the likelihood of being sued has increased. Perhaps the clearest demonstration of this can be found in the increase in the premiums that doctors must pay for insurance, and the way this varies according to the type of medicine practiced. The Medical Protection Society of Ireland has four categories of risk: low, medium, high and obstetricians. Between 1991 and 2000, the premium charged to those in the low category increased by 360 per cent, and that charged to obstetricians increased by 560 per cent. Measured in terms of its impact on peri-natal mortality rates, obstetrics and gynecology can claim a major share of the credit for the huge increases in average life expectancy over the last 150 years. This most successful medical discipline is now also the most sued so successful that almost every unsuccessful outcome now becomes a litigious opportunity. I dont know of any risk assessment that predicted that. There is a distinction, frequently insisted upon in the liter90 / Rotman Magazine Spring 2007
ature on risk management, between hazard and risk. A hazard is dened as something that could lead to harm, and a risk as the product of the probability of that harm and its magnitude; risk in this literature is hazard with numbers attached. So, relating this terminology to Figures One and Two, it can be seen that risk can be placed in the circle perceived through science, while the other two circles represent different types of hazard. Typing hazard management into Google at the time of writing yielded 70,000 hits, and risk management 12 million. The number of potential harms in life to which useful numbers can be attached is tiny compared to the number through which we must navigate using unquantified judgement. The Kelvinist, rocket-science approach to virtual risks, with its emphasis on the quantitatively soluble, threatens to divert attention from larger, more complicated, more urgent problems with which we ought to be grappling.
Recognized as Britains leading academic expert on risk, John Adams is emeritus professor of Geography at University College London. For more of his thoughts on risk, visit his blog at www.john-adams.co.uk. This essay was awarded the Roger Miller Essay Prize by the Association of Insurance and Risk Managers.
News Briefs
SPRING 2007
Rotman School Receives $50 Million from Province of Ontario

A landmark funding announcement for the Rotman School of Management was announced on March 23rd by the Province of Ontario in the provinces 2007 budget. The funding, which will total $50 million, will enable the School to construct a new building to host its newly-established Centre for Jurisdictional Advantage and Prosperity, and provide space for a 50 per cent expansion of the Schools graduate programs, including its renowned MBA and PhD programs. An additional $10 million in government funding has also been allocated to the project, while a further $60 million will be raised from private donations to match the total government funding. The campaign to the raise the private funding is currently more than half way to its goal, and is being led by W. Geoff Beattie, president, Woodbridge Company, who is serving as chair, and honourary co-chairs, Dr. Joseph L. Rotman, chairman and CEO of Roy-L Capital Corporation, and Dr. Marcel Desautels, president and CEO of the Canadian Credit Management Foundation. The new building is to be constructed on the Universitys St. George Campus and will be in addition to the existing facilities on St. George Street, which opened in 1995. The Centre for Jurisdictional Advantage and Prosperity will enhance the provinces prosperity by taking an integrative approach to the study and creation of jurisdictional advantage, says Dean Roger Martin. Currently, the study of how jurisdictions, including provinces, become magnets for companies to start-up, locate and grow, and for talent to study, live and work, has been fragmented across many diverse elds. This disconnected knowledge has been less helpful to policy-makers and businesses than is required. The Centre will remedy this by bringing together the best group of scholars in the world to study jurisdictional advantage in order to create new and valu-
PHOTO: WALEED QIRBI (MBA 01)
able insights that will benet Ontario and the world at large. Over the past decade, the Rotman School has assembled the largest academic research group in Canada dedicated to the study of Jurisdictional Advantage and Prosperity, but has lacked the physical and funding infrastructure necessary to advance the research. Later this year, a world-renowned academic director for the Centre will be announced. BY KEN McGUFFIN
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News Briefs
TSX Invests Additional $750,000 in Capital Markets Institute
Research opportunities at the Rotman Schools Capital Markets Institute (CMI) have been signicantly enhanced thanks to a $750,000 gift from the Institutes founding sponsor, the Toronto Stock Exchange (TSX). Announced in February, the gift established the TSX Capital Markets Initiative at Rotman (The Rotman Initiative), which will provide the CMI with funds to support research and policy initiatives in areas such as cross-border investing, shareholder activism, hedge fund dominance and executive compensation. At the CMI, we investigate issues that impact the competitiveness of Canadian capital markets, says Professor Paul Halpern, CMI director and Toronto Stock Exchange Chair in Capital Markets at the Rotman School. This funding will work to identify effective capital market strategies for Canada and provide policy guidance to government and regulators. We are delighted to have the TSX as our strongest supporter. As part of the Rotman Initiative, Halpern will also lead in the creation and ongoing support of a TSX National Advisory Council, which will meet at least once each year to identify public policy issues concerning regional and national capital markets. This is a rst -of-its-kind network for policy research in Canada, says Richard Nesbitt, CEO of TSX Group. It will encourage a cross-fertilization of research ideas among academic institutions across the country and, at the same time, allow the
informal sharing of ideas among aca- Rotman Vice Dean Peter Pauly (with raised) and Capital Markets demic researchers from Canadas hand Institute Director Paul Halpern (to top universities and the people most the right) opened the Market on Feb. 21 in celebration of the TSX gift. involved in the minute-by-minute changes taking place in Canadian capital markets. Its a very exciting initiative. The University of British Columbia Law School has agreed to be part of the advisory council. We can already see how the council will add a cross-country perspective to the research that various institutions undertake with our support, Nesbitt said. To date, TSXfunding has helped the CMI advance thinking in areas such as income trusts, credit rating systems and enforcement in Canada. The Capital Markets Institute at the Rotman School is Canadas only independent institute for capital markets research. BY CATHERINE RIDDELL.
Gore visits UofT and Rotman

Former U.S. vice president Al Gore visited the University of Toronto on the evening of February 21 to give a sold-out presentation at Convocation Hall about the threats posed by global climate change. [Less than one week later, his lm An Inconvenient Truth, produced by UofT graduate Jeffrey Skoll (BASc 87), would win the Oscar for Best Documentary.] The morning after his presentation, Gore participated in an off-the-record discussion at the Rotman School with 50 institutional investors about the linkages between sustainability and investment management. Pictured, from left, are Keith Ambachtsheer, director of the Rotman International Centre for Pension Management; Al Gore, co-founder and chairman, Generation Investment Management; and Jane Ambachtsheer, global practice leader, responsible investment, Mercer Investment Consulting and faculty member, Uof T Centre for Environment.
PHOTO: KEN McGUFFIN
A Masters Class in Retail

Having toiled for Canadas most successful retailer from the age of 16 working his way up to president of Canadian Tire Retail Rotman alumnus Mark Foote (MBA 91) recently took on the role of president and chief merchandising officer at another Mark Foote (MBA 91) Canadian retail icon, Loblaw Companies Ltd. Foote took the stage on January 9th in the ongoing Rotman Merchandising Experts Speaker Series. My presentation today will be about an industry that I am passionate about, he began, and his passion showed as he proceeded to give a masters class in retail. To create a formula that is both distinct and successful, a retailer must possess three things, says Foote: an intimate knowledge of the customer; a clear idea of what they are about as a company; and a clear view of competitors offerings. These three elements, when considered together, form the retailers brand identity, he says. It may sound simple, but this stuff is the soul of retail. One example of a retailer who excels with customercentricity is Best Buy, he says. They break their customers into segments or chunks: there is Jill, the soccer mom, and they know exactly how she shops; then theres Barry, the hi-fi
fanatic. They actually plan their merchandising around these characters. Another retailer Foote admires greatly is Target, which he feels delivers its brand seamlessly. Better than anyone else, they understand that everything speaks, from their web site, to their signage, to their employee uniforms, everything has a consistent look and feel. Such brand-based thinking is actually liberating, says Foote. You dont lie awake at night worrying what your competitor is doing, because you are too focused on realizing your own brand promise. Sales associates have a lot to do with a retail stores success, he says. Studies show that when an associate approaches a customer and is helpful to them, there is a 20 per cent sales increase vs. when no one approaches that customer. Thats a huge number, he said. As a result, retailers are now starting to segment their employees in the same way they segment customers placing them in categories ranging from stars to weak players. The total combination of each of these characters in a store can have a major effect on the bottom line. Retail used to be seen as a place to work while you looked for a real career, he says, but thats because retailers werent creative enough about the things Ive discussed today. Whats next for retailers, according to Foote? Absolute internal simplicity; igniting innovation; unlocking talent; integrated brand delivery; and more customer-centric merchandising. In short? Lots of real careers. BY KAREN CHRISTENSEN
Students Visit China on Study Tour

For a full two weeks in January, a group of 32 Rotman MBA students immersed themselves in the worlds fastest-growing economy, learning about the opportunities and risks associated with Chinas integration into the global economy. Site visits to Chinese and international companies in Hong Kong, Beijing, Shanghai and Shezhen were combined with instruction by the tours academic director, Prof. Wendy Dobson, a leading expert in Asian economies and director of the Rotman Institute for International Business. The students also had a chance to hear from additional guest speakers from the worlds of academics and business, as well as from Rotman graduates who live and work in the region. We pride ourselves on the international nature of our students and class content, and this type of study tour provides invaluable hands-on experience, says Richard Powers, assistant dean and executive director, MBA Programs. It gave our students rst-hand opportunities to learn more about market
entry, partnerships, joint ventures, Some of the second-year Rotman MBA students who outsourcing, and the legal complexi- enjoyed a study tour of China in January. ties of doing business in China. A second MBA study tour, to India, takes place in May 2007.
BY KEN McGUFFIN
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News Briefs
The Rewards of Imagination: Cultivating the Creative Impulse
The creative impulse can be crucial to a companys bottom line, argues strategist Alex Manu, but too often, organizations hinder creativity in the interest of efficient and predictable productivity. Manu, founder and director of the Beal Institute for Strategic Alex Manu Creativity at the Ontario College of Art and Design, presented tactics for organizations wishing to unleash their full creative potential in a January presentation at the Rotman School. In his talk, titled after his book The Imagination Challenge: Strategic Foresight and Innovation in the Global Economy (New Riders, 2007), Manu argued that the secret to nurturing creativity is to recapture the sense of play that each of us had as children. Work systematically deprives us of opportunities for imagination, he says. We subcontract play, but without play, the imagination and creativity die. To restore a sense of child-like play, we need to unlearn what we already know; just as we once had to unlearn, for example, that telephones need to be plugged into the wall. Unlearning needs to become an essential competence of indi-
viduals and organizations, he stresses. The ecology of the imagination is free, separate from reality, uncertain in its outcomes and governed by its own rules. Only those who cultivate a sense of creativity can recognize the vast potential economic, social and otherwise of new technologies, says Manu, who presented a wealth of examples of new inventions whose original promise was comically unappreciated at their conception. When, in the 1820s, inventor Michael Farady was asked by an unenthusiastic British prime minister to explain the use of his new contraption, the electric motor, he stated, Sir there is every possibility that you will soon be able to tax it. Manu believes it would be a similar mistake to underestimate the future impact of products like the iPhone, which hasten the advent of the internet of things, a dataspace in which each person, object and space is both a link and a holder of information. Also called the real world web, the embedded landscape and everything media, the new technological landscape will vastly expand the opportunities for the general public to participate in new and unforeseen forms of cultural, economic and intellectual expression. How do we create products, content, services, experiences and business models for this new context? The solution is to use what Manu calls strategic foresight, which involves visualizing not just possible applications of the new technology, but its potential to satisfy the deepest of human needs. Strategic foresight reveals the possibilities present at the intersection of latent needs and current technology, he says. We must ask, if this technology happens, what will people want to do with it? Those who can answer the question will not only predict the future, but in some ways own it. BY STEPHEN WATT
Private Equity: A Phenomenal Past and Uncertain Future
Mark Wiseman (JD/MBA 96) and Tim Dattels
The private equity market has shown unprecedented growth of late the global volume of leveraged buyouts (LBOs) has nearly doubled in the past 18 months alone but the industry is ashing yellow, according to Tim Dattels, a partner at TPG Capital, one of the worlds largest private equity (PE) investment rms. On March 5, Dattels, a member of the Rotman Deans Advisory Board, gathered with Mark Wiseman (JD/MBA 96), senior vice-president of private investments for the Canada Pension Plan Investment Board and Brent Belzberg, founder and senior managing partner of TorQuest Partners, to debate What is Really Happening in Private Equity, a discussion moderated by Dean Roger Martin. Much of the expansion in private equity has occurred overseas, as markets in Asia and Europe continue to mature. This is an industry thats being exported, said Dattels. The industry has also received an unexpected boost from the SarbanesOxley Act of 2002, which has pushed U.S. public companies to
Saving the U.S. Stock Exchange

The New York Stock Exchange appears to be losing market share to foreign exchanges, a worrying trend for those who believe the Sarbanes-Oxley Act of 2002 has placed a too-heavy regulatory burden on corporations trading in the United States. However, calls to save the NYSE by scrapping SARBOX are premature, says Luigi Zingales, McCormack Professor of Entrepreneurship and Finance at the University of Chicagos Graduate School of Business. Zingales is a member of the Committee on Capital Markets Regulation, a bipartisan group which released a report on November 30, 2006 on ways to maintain and improve the performance of U.S. equity capital markets. On January 26, he visited the Rotman School to discuss the committees ndings in a talk entitled Are U.S. Capital Markets Losing Their Competitiveness? Recommendations of the Committee on Capital Markets Regulation. In 2005, 24 out of 25 of the worlds largest IPOs took place outside of the U.S.; Zingales, however, attributes this development to globalization and the maturation of foreign exchanges. Its not necessarily that the U.S. is doing something wrong, he says. Its that the rest of the world is doing so much better. There are natural advantages for a Chinese bank to list in Hong Kong, for example the sort of go local strategy that accounts for much of the movement toward foreign markets. Zingales is more concerned by the recent ight of global IPOs away from the NYSE. While global IPOs companies that choose to sell their shares both on local and international exchanges count for only a small portion of the annual IPO total, their function is that of a canary in a coal mine, pointing to
a larger risk of capital migration. This has repercussions beyond just the local New York economy, he says. If there is something wrong, the effect will be felt throughout the U.S. economy at large. For well-governed companies with a history of transparency and accountability, the costs Luigi Zingales of complying with Sarbanes-Oxley may outweigh the benets. The act, which was passed in the wake of a number of highprole corporate scandals, also places a heavy personal burden on directors: in two recent cases, directors have been forced to pay settlements directly out of their own funds. Zingales asks, If Im the director of a European company, why would I take personal risk to list in New York, especially when New York is not visibly superior to Frankfurt, Paris or London? In its report, the Committee on Capital Markets Regulation makes a number of suggestions for improving Sarbanes-Oxley, including the implementation of new measures to assess liability, better shareholder protection, and a cap on auditors and directors liability. The committee advises against getting rid of legislation entirely, since part of what made this country great is its ability to provide a safe and regulated environment in which to do business, says Zingales. Given that we cant change how well the other markets are doing, we must do our best to perfect our own markets to make sure they retain their attractiveness to investors. BY STEPHEN WATT
the private market (or to foreign exchanges in places like Hong Kong), where there is less need for public disclosure and executive compensation is unrestricted. Living by what the analyst or your most vocal shareholder says is not an easy way to run a business, said Belzberg. Roger Martin agreed that the burden of regulation imposed by Sarbanes-Oxley has hurt companies trading on American exchanges: Scrutiny is good, but only when theres a theory behind it. Scrutiny for the sake of scrutiny is harmful. The trend for public companies to go private has received its share of criticism. Global PE firms such as KKR and Blackstone have been widely portrayed in the press as predatory locusts that re employees en masse and strip companies of assets. The rms stellar prots returns of 50 to 60 per cent are common have drawn criticism from nationalist politicians in countries like Germany, Korea and Japan. The panelists took a different view, however, contending that private equity rms have thrived not by stripping assets
from the companies they acquire, but by building and sustaining value. The success of private equity at the end of the day, largely relates to the fact that its simply a better model of corporate governance, said Wiseman. Dattels agreed: We can attract the best management because we can put together compensation packages that are directly aligned with our interests and make them very attractive. Unlike public companies, which tend to focus on share price and manage to the latest quarter, privatelyowned rms focus on long-term growth. Whether such growth can continue indenitely is another question. The increasing potential for a global economic recession and the sheer unlikelihood of sustaining such phenomenal returns may call for a more cautious approach. Higher interest rates could spur higher debt costs, which pose a real danger for such a leveraged industry. We have been operating, without question, in the best of times, said Dattels. Will we continue to achieve 50 to 60 per cent returns? Wed be thrilled but I dont think that will happen in the future. BY STEPHEN WATT
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News Briefs
A Showcase of MBA Creativity
The winners of the second annual LENS photography competition were recently announced, launching a month-long exhibition of student photography at the Rotman School. The winners of the second annual LENS photography competition were recently announced, launching a month-long exhibition of student photography at the Rotman School. LENS 2007 featured photos taken by students enrolled in the two-and three-year MBA programs. This year 167 entries from 35 students were submitted for consideration. Ten winners were selected (including the top three, pictured here). This years winners were Mike Graham (MBA 08) in first place; Michelle Lozano (MBA 07) in second; Jon Kimball (MBA 07) in third; and placing fourth was Kathy Skelton, (MBA 08). Rounding out the top ten, in no particular order, were Fernando Sepulveda (MBA 08); Roger Thompson (MBA 07); Valerie Whitt (MBA 07); Richard Ahn (MBA 08); David Keil (MBA 08); and Ross McKegney (MBA 08). Judges drawn from the arts and photography communities had a difcult time selecting winners from the high quality entries. Serving as judges were Gary Barton from Amplis Foto; Nancy Lang, artist and publisher; Beth MacKinnon from Production Kitchen; and Laurie Potts from Laurie Potts Design Custom Framing. LENS 2007 is generously supported by the Rotman
PHOTO: MICHELLE LOZANO
PHOTO: MIKE GRAHAM
The top three images from this years LENS competition
School, MBA Program Services, the Rotman Graduate Business Council, and Richard Powers, assistant dean and executive director, MBA Programs. BY KEN McGUFFIN
KWA Strengthens Schools Leadership in HR Management

The Rotman Schools leadership in Human Resources Management has been strengthened by a recent gift that will help it attract leading HR executives to its MBA program. The KWA Partners Award in Leadership will provide a continuing student in Rotmans Two-Year MBA program with $5,000 to help fund their education in the area of Human Resource Management. The award, the result of $25,000 gift from KWA Partners, was announced by Ron Dahms (MBA 99), managing partner at KWA Partners, at an event hosted by KWA in October. In creating this generous scholarship, Dahms notes, The Rotman School and Dean Roger Martin have played a key role in my business career. I am delighted that the Board of KWA Partners has committed to establish this annual scholarship
recognizing a future Human Resources business leader. The KWA Partners Award in Leadership provides a boost to the Organizational Behaviour and Human Resource Management (OB/HRM) area at the Rotman School, which aims to create a collegial environment in Ron Dahms which faculty can pursue high-quality research in these elds. I am truly grateful to Ron Dahms and KWA Partners for establishing this award, said Dean Roger Martin. This will help us create leaders that can bring the best out in people. At Rotman, we believe that creating strong teams creates strong businesses. KWA Partners is a national network of entrepreneurial career management professionals that employs more than 150 people nationally. The partners share a common set of values and beliefs and are dedicated to providing personalized career transition services to their clients. BY BELMIRA AMARAL
PHOTO: JON KIMBALL
Students Display a Winning Approach to CSR

For the second consecutive year, a team of MBA students from the Rotman School won an international case competition held at the George Washington University School of Business. The Rotman team, consisting of rst year MBA student Sarah Stern and second year MBA students Abhijit Rawal, Hala Kosyura, and Ellie Avishai, defeated teams from 20 other business schools to take the rst-place prize. The annual competition, held in March in Washington D.C., focuses on nding solutions for a particular not-for prot agency. This years case focused on the American Association of Retired Persons (AARP), which is trying to determine whether it should expand its services to include the 25 to 34 age group.
The Rotman team proposed a solution based on a savings initiative that targets families. Further details about the competition are available online at: www.gwu.edu/~casecomp/ index.htm. The Rotman team was supported by the Schools AIC Institute for Corporate Citizenship, which aims to help current and future business leaders integrate corporate citizenship into business strategy and practices, and the Rotman Schools MBA Program Services Ofce. In recent years, Rotman students have become increasingly interested in corporate social responsibility and issues facing not-for-profit organizations. In November 2006, Roman Net Impact hosted the rst ever Corporate Social Responsibility Case Competition for students at Canadian business schools; on March 21, 2007, the Annual Leadership in Social Change Career Fair & Conference was held at the School; and this spring, Rotman NeXus, a non-prot management consulting service staffed by MBA students began its third year of operation. BY KEN McGUFFIN
Dean Gives Integrative Thinking Refresher

Having kicked off the Rotman Integrative Thinking Seminar Series in 2001, observed more than 50 sessions, and spent the past six years studying the thinking patterns of those featured [compiling his ndings into a forthcoming book, to be published in 2008 by Harvard Business School Publishing], Dean Roger Martin reclaimed the stage in the Schools popular Series for three sessions in February. Between 2001 and 2007, the Series has hosted a variety of renowned CEOs and thought leaders, including Jack Welch, Michael Dell and A.G. Laey. My goal when we started was to try to gure out how these highly-successful people think, said the Dean. I was looking for patterns. I wanted to know, what was the thinking that led them to the doing? We all use models in our thinking, he says. Its how we make sense of the world. Armed with these models, we suffer from nave realism,: We believe that what we see is what really is. Our models become indistinguishable from reality, and therefore reality differs from person to person. After studying the thinkers featured in the Series to date, Martin has revised his model for Integrative Thinking, which still consists of four steps. The rst step in building understanding is Salience what do we pay attention to, and what
not? In this initial step, we decide what is relevant to our decision. Second is Causality. How do I make sense of what I see? What sort of relations do I assume between the pieces of the puzzle? The third [newly-named] step is Architecture. In step three, the framing of a model is built, based on what you have arrived at in the rst two steps. And the nal step is Resolution: what will your decision be, based on your reasoning? The tricky part is that everyone around us is doing the same thing, following steps one through four, whether they realize it or not, and that leads to clashing realities: Those who dont agree with our model are seen as either stupid or evil, which creates forks in the road. Thats why reacting to model clash is the most important challenge managers face day to day. There are two ways to deal with model clash. The rst is to fear and avoid it to basically ignore the existence of the clash. The second, far superior approach is to seek out and leverage model clash. Those who choose this option actually seek out the tension that model clash entails, and enjoy it. They say to themselves, what did that person see that I didnt see? Scenario two is the source of the greatest insights and resolutions, says Martin. Its where all the highly-successful leaders reside, and its where we all want to be. However, we cant get there without serious contemplation of the opposing models we are facing, combining insights from the clashing models to form new models. As the speakers in this Series have shown us, there is never a situation where a better model doesnt exist or cannot be built. BY KAREN CHRISTENSEN
Note: Roger Martins three February sessions are available for viewing online at www.rotman.utoronto.ca/integrativethinking.
PHOTO: JOHN HRYNINK
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Rotman Experience
Roger Thompson (MBA 07)
Applied Portfolio Management Comes to Life
Bright and early one November morning, our 2.5 hour ight took off, and before we knew it, we were in Omaha and sitting on a bus ready to meet the Oracle of Omaha. Arriving at the Field House, we took our seats along with a group of students from Yale, and before we knew it, Mr. Buffett appeared at the back of the room, moving through the crowd like a seasoned celebrity (wait a minute, he is a celebrity). People were trying their best to get a picture of him; I even saw one Yale student standing on a chair just to catch a glimpse. After Mr. Buffet warmly welcomed everyone to Omaha, the Q&A session began. Anybody who has had an opportunity to hear Mr. Buffet speak can attest to his down-to-earth demeanor and great sense of humour. Near the beginning of the session, he invited everyone to help themselves to a drink. Feel free to have a Coke, he said. Actually, you dont even have to drink it just open it, because that means another penny in Berkshires pocket. What piece of legislation would you change in America? asked one student. The public school system is like virginity, he replied. Preserved, but not restored. The American system of private and public schooling creates inequalities which will continue to be confounded as times goes on I would abolish the private school system. Following are some of the highlights of our session with the oracle of Omaha:
What would you like people to say about you when you die? My God, that guy lived a long-time. Why do you still live in Omaha? There is a lot of family history here, and Omaha gives me the chance to think, to travel almost anywhere in 2.5 hours, get to work quickly, and Im with my friends what more can you ask for. Why did Benjamin Graham, your mentor, retire early? Graham didnt like money like I did, and he had this feeling like he had already done it all and wanted to move on to something else. How do you keep agency costs low at Berkshire? The current management is happy nancially, and they work because they want to. We dont have employment contracts and we have set up a fair compensation system. We have never lost a manager in 41 years. What are your thoughts on climate change? Im not a scientist, and Im not sure which way it will go, but I do know that you need to err on the side of caution when it
For the past three years, a group of lucky Rotman students has had the honour of ying to Omaha, Nebraska to meet legendary nancier Warren Buffett, as part of the second-year Finance courses taught by Professor Eric Kirzner. These trips have been made possible by the generosity of Rotman alumnus John Watson (BCom 66, MBA 67), who also created the Value Investing Chair at Rotman (held by Prof. Kirzner.) This past November, more than 100 members of the Value Investing, Security Analysis, and Applied Portfolio Management classes (including myself) enjoyed this unforgettable experience. Unlike many of my fellow students, I am not seeking a career in nance. My reasons for enrolling in this course were personal: I wanted to be able to better manage my own portfolio, and to understand the processes that nancial advisors employ. I hoped that this trip might give me the opportunity to learn a few things from one of the greatest investors of all time, who shares the same beliefs that I do in terms of the efcient market hypothesis.
comes to the environment, and the only way something good will happen is if governments work together.
What do you view as the biggest problems in the world? Weapons of mass destruction is number one and climate change is number two. Both will be difcult to resolve, because government policies last longer then an electoral term, and there is no accountability in terms of implementation/changes to these policies. Long-term problems are very difcult to tackle in a democracy. How can business leaders contribute to countries of the world that need help? I dont believe that divesting interest in companies that are destructive, or utilizing shareholder voice to get them to change will really work. Oil companies have been doing terrible things for years, and women couldnt vote in the U.S. until the 1920s we arent really better off than anywhere else, were just farther ahead. How do you make sell decisions? In the past it was simple, we would sell a security when we found one that had better value. That has changed, and we simply do not sell majority stakes because we believe that we have made a promise to management/ownership that we would be partners. Our value comes in our ability to promise stability to companies. Can we still nd value in the market with information so readily available? Absolutely. Human beings do dumb things, and they do it in groups specically, the stock market is like a demented partner who reacts to every little piece of news without fully considering the underlying value. Look at junk bonds in 2002 the masses overlooked their value. What was your best investment ever? It was a Dale Carnegie course that I enrolled in to alleviate my nervousness communicating in front of large groups of people. It is very important to everybody in the room to continue investing in themselves.In terms of investments in other companies, Id have to say GEICO. What are you thoughts on philanthropy, and why did you donate your wealth to the Bill & Melinda Gates Foundation? The goal of charity is the complete opposite of business. Business is about making easy money nobody ever cares about how hard you worked to get the money, just about how
much you made. Charity is about solving the hardest problems in the world, and you are bound to make mistakes. Im not personally comfortable with a low batting average; I like to win, so I would have a hard time handling the world of philanthropy. Bill and Melinda are smart: they put their own money into the Foundation and are much younger than I am, so giving them the money now, I hope, will provide them with the ability to improve more lives.
Bill and Melinda [Gates] are smart and are much younger than I am, so giving them the money now, I hope, will provide them with the ability to improve more lives.
After the Q&A, Mr. Buffett invited everybody to join him outside for a photo opportunity. It was an amazing site to see: he stayed outside in the cold (-2C) weather with no winter jacket for about 45 minutes, smiling with students for pictures. He had mentioned during the Q&A that he now chooses only to meet with students, and not the general business community, which I think is a great testament to understanding his values. After everybody had the opportunity to have their picture taken with him, Mr. Buffett disappeared: his exit was as quick as his entrance, and everybody who had huddled inside to keep warm headed for the bus. As our day drew to a close, I think we all recognized what a wonderful opportunity we were just afforded. All we can do thank Mr. Watson, Prof. Kirzner and Mr. Buffett for one of the most memorable days of our lives. As I mentioned earlier, I had hoped to gain insight into managing my personal portfolio, and thanks to this trip, Ive come to the following conclusions;
1. Never invest in something you dont understand 2. Risk is for the ignorant make sure you are well informed 3. Volatility is a good thing especially if you want to make
a lot of money As I head off into the sunset with my Rotman degree in hand, I will take to heart two sayings that Mr. Buffett quoted during our day with him: Do what you love, and you will be happy, and, Dont do anything you wouldnt want to see in tomorrows newspaper headlines.
Roger Thompson (MBA 07) is now a senior nancial management consult-
ant with IBM Global Services Canada

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Alumni Prole
David Patterson (MBA 79)
Chair and CEO, Northwest Capital Management
Interview by Karen Papazian How did you get from being a student in the MBA program to the founder of Northwater Capital Management a $10-billion investment management rm? As soon as I nished my rst course in the part-time MBA program, I immediately started portraying myself as completing my MBA and landed a job as a trainee at what was then called Canada Permanent Trust Company. In a little over three years I completed my degree and became head ofce branch manager. At Canada Permanent, we had had a huge mismatch on our balance sheet a $1-billion mismatch on a $5-billion balance sheet where we were borrowing from savings accounts and investing in ve-year mortgages (during a period when interest rates were rising dramatically). Partly from my experience in the MBA program, and partly out of my wifes experience in her own MBA studies, I was able to design a hedging program to mitigate the interest rate risk that threatened the company. It went unused, but when I went to the Bank of Montreal, I already knew something about hedging at a time [in 1981] when many other bankers didnt. With only 18 months at the Bank of Montreal, the then independent investment bank, Burns Fry Ltd, heard that I was hedging out the interest rate risks using futures contracts on the Toronto Futures Exchange, and they recruited me to work with them on hedging programs in the Futures Department. I ended up becoming the director of futures and options at Burns Fry, and when Securities Pacic Bank bought a piece of Burns Fry, I moved to Chicago as the president of Securities Pacic Futures. In January of 1989 I was ready to return to Toronto and start something of my own. Thats when I founded Northwater Capital Management. Today, Northwater Capital is a $10billion investment management rm with clients in Canada, the U.S., Europe, Britain and Australia. The rm was founded on a strategy that avoided the foreign property rule on pension funds by using derivatives. In 1994 we added a hedge-fund-offunds, seeking to add a diversied portfolio of alpha to our synthetic beta portfolios. What is the most exciting part of your job, and what is the most challenging? By far, the most exciting part is seeing a young person come
into the rm and develop into a leader, taking on responsibilities, pushing their limits and growing their capacities. I used to think the most challenging part was dealing with people, but over the years, I have realized that the only truly challenging part of my job is managing myself and recognizing that my own thought patterns are creating the reality around me.
What do you do in your spare time? I enjoy reading philosophy, psychology, astronomy, and mathematical cosmology. I spend weekends hiking and snowshoeing at my country home with my wife and our two dogs. Although I am not a huge fan of spectator hockey, I have my own backyard ice-rink where I skate and play hockey. What advice would you offer to current MBA students? Read. Read. Read. There is so much value in reading newspapers, books, journals, etc. I am always astonished to nd out how little people read these days. Early in my career a headhunter gave me what was maybe the best advice that I have ever received from a career point of view. He told me to develop a deep expertise in something. Obviously, if you think in a forward-looking manner (a deep expertise in nanotechnology rather than in wheel making for horse-drawn carriages) it will help your career. In my own case, my deep expertise lies in hedging and derivatives. You can see that I built my career and rm on that understanding. One last piece of advice I would give to todays students is to understand how systems work. I greatly respect Roger Martins focus on Integrative Thinking and the management of systems. One of the things we emphasize at Northwater is the importance of optimizing the whole not just the parts.I may be the only CEO in Canada who wanders around telling his people not to do their best, because in any system, you can only optimize one thing at a time: if you are doing your best by optimizing yourself, you are not optimizing the rm. For us, we include our clients, our employees and their families, our suppliers and our environment in the system we are trying do optimize. Most western businesses dont understand systems and dont understand this critical point. They take an accounting point of view that suggests the bottom line is the sum of the parts. It isnt. You have to understand the feedback loops to optimize a whole system.
Randy Pilon (MBA 05)

Chief Executive Officer VIROX Technologies Inc.
Interview by Stephen Watt What is Virox Technologies and how did it come to be? During my time as Corporate VP for Bausch & Lomb Canada (B&L), I enjoyed working on entrepreneurial ventures as a side interest, and twice met a Bay Street lawyer who specialized in start ups. The life sciences group at the Royal Bank spoke to the lawyer and called me to work on a business plan for a scientist who had invented a new disinfectant. The scientist had a lot of data 10 years worth of R&D but no business plan, and no idea how to start! The plan that I wrote was a hit with everyone but the scientist, who felt it was impractical, too risky and potentially too long a play. My plan contemplated a multitude of disinfectant products, licensed to some of the largest companies in the world. In June 1999, Virox was incorporated. I raised seed capital from friends and family and invested myself, as did the lawyer. We paid off the scientist and brought in a young chemical engineer PhD to make the vision a reality. The company is still governed by the six strategic imperatives outlined in the original business plan in 1998. By founding Virox, you gave up the security and prestige of a high-paying job as corporate executive in order to start all over again as an entrepreneur. What brought on this highrisk move, and was it worth it? I was 35 at the time, had seven promotions in 13 years, but always had the entrepreneurial bug. That bug is what made me successful in corporate life, and got me elected to B&L s Elite International Strategic Planning team, one of 17 handpicked strategic thinkers. I felt if I went on an entrepreneurial tangent and it didnt work out, corporate life would welcome me back. B&L offered me a lucrative consulting agreement for several months as a way of keeping some sort of link if I didnt end up nding greener pastures. I would lose some money and maybe some time, but I would gain a wealth of knowledge and experience. Most importantly, I would never have to look in the mirror and ask, What If? Opportunities abound: you need to stop waiting for the ship to come in, and swim out and nd one. What is your greatest challenge? In the early stages, it had to do with raising capital and managing
a diverse group of shareholders. Shareholders are, like any investor, innately impatient. As the company grew, we needed to stage the in-ow of talent. Since I believe in a quality not quantity model, these people were expensive relative to what the company could afford. I hand-picked most of my people through contacts and referrals, and most are still with us. In November 2006, we were collectively presented with the coveted Canadian American Business Council Award as an ideal example of a cross-border partnership.
What is your fondest memory of your Rotman experience? Rotman was amazing: the students, the professors, the environment, the format [Randy completed the One-Year MBA for Executives], the experience, and the pride in being part of an iconic institution like UofT. I still keep in touch with several students and professors on a regular basis. I suppose one of my fondest memories was when I received the You Speak We Listen award from the class and faculty, quite an honour. A close second would be when I was invited back several times now to speak to other Rotman MBA classes on entrepreneurialism. Finally, the look on my wife and childrens faces at Convocation was unforgettable. What do you do for fun? I coach lacrosse and have played for 11 years, do guest or keynote speaking, consult and invest in start up companies. But my real joy comes from my family. They are the reason I get up in the morning and try so hard. Whats next for you? Virox is in fun mode. The heavy lifting is done, and we are growing exponentially. We recently acquired 15,000 feet next to our facility, bringing us to nearly 40,000 square feet, including R&D, marketing, technical services, client services, nance, regulatory compliance, production, operations and logistics. Three patents are issued, three more pending, and we are now global with our partners tier-one names like JohnsonDiversey, Bayer, and Steris in seven market silos where disinfection is key. In 2005, I completed the Institute of Corporate Directors course as a certied director. Next, I plan to expand my role on boards, especially startups. I also want to mentor those that need the sort of help that I didnt have the luxury of being offered.
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Alumni Capsules
Dimitris Vidakis (MBA 06) Risk Manager Equity Derivatives Commerzbank AG Lives and works in: London, England
Best thing about my job: Exposure to exotic equity derivatives trades, and the opportunity to closely follow current trends in the market. My biggest challenge: There is enough complexity and constant innovation to keep me on my toes. It is very exciting. Most important skill(s) for my job: Strong finance background, willingness to learn, and of course people skills. Proudest moment: Being selected for the job I really wanted from a large pool of candidates. The words that best describe me: Persistence and patience, never giving up at the rst difculty, and believing in myself. How I relax: I love to travel. Three weeks ago I was in Paris for the weekend: on the way back it felt like I was away for a week. Amazing. Most important thing my MBA taught me: A strategic perspective and the managerial skills I need. Words of Wisdom: Dont be afraid to learn new things, always try to reach your full potential and never trade long term goals for short term ones. The riskiest thing Ive ever done in my career: Giving up one of the best jobs in my eld in Greece to start over again in London.
performance demands are constantly increasing, my learning and development never stops. Most important skill(s) for my job As well as analytical skills, people skills are also important since success often hinges on professional relationships and your reputation on the Street. You also need to have vision to adjust your strategy over a hold period. Proudest moment: Finishing as a semi-nalist in the Muay Thai (Kickboxing) 2006 U.S. national team qualiers. The word that best describes me: Tenacious. The most innovative thing Ive ever done is: Leveraging the skills developed from working at a Canadian REIT and growing them into a marketable skill set for Wall Street. How I relax: I have been an competitive amateur Muay Thai kickboxer for over seven years and ght internationally at a competitive level. Most important thing my MBA taught me: Although I wasnt as smart as I thought I was, the smartest guy in the room doesnt always take home the biggest paycheque. Words of Wisdom: We are truly capable of achieving our goals if there is a genuine personal investment and belief in those goals. The riskiest thing Ive ever done in my career: Quitting my Bay Street job, relinquishing my comfortable life in Toronto and moving to New York to start a career all within two weeks.
Bernard Lee (MBA 03) Associate, Deutsche Bank Real Estate (RREEF) Lives and works in: New York City
Kerrie MacPherson (MBA 91) Americas Transaction Support Leader Ernst & Young LLP Lives in: New York City / Toronto / Haliburton Works in: New York City / Americas / the globe Best thing about my job: Unending variety and fabulous, talented people. My biggest challenge: Attracting and retaining enough bright people to capitalize on market opportunities. Most important skill(s) for my job: Ability to listen, vision, energy and
Best thing about my job: Working with some of the smartest real-estate professionals on Wall Street at one of the worlds top rms. I learn something new every day. My biggest challenge: We constantly strive for excellence, offering something to our investors that our competitors can not. Because
credibility. Proudest moment: Congratulating a mentee on making partner at E&Y. The word that best describes me: Determined. The most innovative thing Ive ever done is: Established a
dedicated financial services transaction support team in New York. How I relax: Travel with my husband and spa days with my friends. Most important thing my MBA taught me: Networks are incredibly valuable. Words of Wisdom: Go for it! The riskiest thing Ive ever done in my career: is also the best thing Ive always said yes to opportunities that were a stretch.
Oyvind Fjugstad (MBA 87) CFO McDonalds Norway Lives and work in: Oslo, Norway
Amy Parr (MBA 06) Regional HR Manager, Asia and Middle East Royal and SunAlliance Lives and works in: Dubai, UAE
Best thing about my job: Traveling to countries that Ive never been to before. My biggest challenge: My new boss is very challenging and has extremely high expectations. At rst I wasnt sure how to handle him, but now I realize that hes stretching my current capabilities and encouraging me to develop new skills. Most important skill(s) for my job: Inuencing senior leaders. Proudest moment: Performing really well on a presentation to the regional management team. The word that best describes me: Opportunist. The most innovative thing Ive ever done is: I once used my tape lint brush to quickly clean a small section of carpet. It was effortless and worked like a charm! Too bad I didnt get this idea patented before Wal-Mart started selling a gadget remarkably similar to my idea. How I relax: Bikram yoga or a visit to the spa. There are several wonderful spas in Dubai! Most important thing my MBA taught me: Everyone has a different perspective worth listening to. Words of Wisdom: (1) Dont just think it, do it (2) No regrets. The riskiest thing Ive ever done in my career: Moving to the Middle East instead of accepting a great job at a consulting rm in Toronto.
Best thing about my job: Lots of challenges professionally, and the fact that I have time to have a private life! My biggest challenge: For the moment, trying to change a negative sales trend by working through our franchisees. Most important skill(s) for my job: Flexibility, good humour and the ability to see the whole picture. Proudest moment: Im very proud of my family and the things we have achieved together. The words that best describe me: Good humour and optimistic. The most innovative thing Ive ever done is: Back in 1981 I was the rst Norwegian student to attend the University of New Brunswick. I dont know if that can be called innovative, but it surely was different. How I relax: Refurbishing our house, spending time at our cabin up in the mountains, and my social life with my friends and family. Most important thing my MBA taught me: The ability to see a business as a whole, and not just as different departments put together. Words of Wisdom: If youre at rock bottom, things can only improve! The riskiest thing Ive ever done in my career: I guess leaving a safe career in banking for a CFO job in a software house which almost went belly-up the month after I arrived did involve some risk. But I learned a lot in a short 15 month timeperiod. I wouldnt be the same without that experience.
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2007 Robert Half
Class Notes
Editor Jack Thompson
Spring has nally arrived, and around the University, that means its reunion time! Rotmans annual reunion for honoured years (ending in 2 or 7) takes place on May 31. Contact our ofce for the full details. And watch this space in the Fall issue for the stories and pictures. June 1 is our annual Life-Long Learning Day, at Torontos Four Seasons Hotel. All alumni are invited, and guests are welcome as well. Full details of the agenda, fees, and registration are online at www.rotman.utoronto.ca/events/. I hope to see you there. Nows the time to start writing YOUR Class Note for the next issue, titled The Quest, which will hit your mailbox by September 1st. Keep them coming! Jack
MBA/MCom/DBA Full & Part-Time
1956
Neil Bryson has retired from senior management
Gary Halpenny
Gary.Halpenny66@rotman.utoronto.ca
1967
MBA Class Champion: Len Brooks
positions at Brinks Canada and Burlington Hydro Inc. He continues to work at Neil Bryson Consultants in some 20 countries and Toffet Investments Inc., a private investment company.
Len.Brooks@rotman.utoronto.ca Reunion Alert!

This class is celebrating a banner anniversary on May 31, 2007. For more information and to RSVP, please visit: http://www.rotman.utoronto.ca/alumni/reunion.htm, contact your Class Champion or the Alumni Ofce.
1959
Peter Williams retired from Ryerson 15 years ago. Peter & Nancy spend 6 months in Oakville and 6 months in Port Charlotte Florida in a community called Maple Leaf Golf & Country Club. Life in Maple Leaf is quite active. Our hobbies and activities include communications systems (video and sound), Photography (making DVD movies from digital photos), Stained Glass, Bocce, Aqua t, Computer Club, Red Hat Society (women only), newsletter editing, and much more. Grand children are getting wed and producing great grand children.
1968
MBA Class Champion: George Hayhurst
George.Hayhurst68@rotman.utoronto.ca
1969
Fred Berg recently retired after a long and reward-
1964
John Bulloch is trying to understand what so called
retirement really means. He is the founder of the Canadian Federation of Independent Business and the founder of Vubiz Ltd, an e-learning company. He is also invested in real estate and spends time with grandchildren and a condo in Maui. A photo can be found on the governance section of the web-site at http://vubiz.com. John is also a proud recipient of the Distinguished Business Alumni Award. Pierre Giroux is vice president with MBNA Canada Bank in Ottawa.
ing career in the elds of human resources and education. Fred and Sheila enjoy spending time with their grandchildren. They recently returned from a very enjoyable trip to Hong Kong, New Zealand and Australia.
insurance-banking-and brokerage eld. As I am retiring in December of this year, I recently seconded my responsibilities of President of National Bank Direct Brokerage although I am acting as vice chairman of the Board. I am also sitting on others boards like Natcan Trust, National Bank General Insurance. I had a terric career within the National Bank organization and am acting as a mentor for junior executives in the organization. I was also involved many years in the MBA Association of Quebec and acted as chairman of the Board of the Association a few years back. I will continue to work in 2008 but at a less frenetic pace; my wife (Diane) and I will be spending more time in Bonita Springs, Florida enjoying the sun and playing golf! By the way, my wife and I had our rst home at the graduate student residence on Charles Street in 1969! Time ies so quickly! Getting a fantastic education at U of Ts school of graduate business has been extremely rewarding both from a professional and personal point of view! David McFarlane is president of McFarlane Amerlee Consulting Limited in Calgary.
1972
Reunion Alert!
This class is celebrating a banner anniversary on May 31, 2007. For more information and to RSVP, please visit: http://www.rotman.utoronto.ca/alumni/reunion.htm, contact your Class Champion or the Alumni Ofce. Steven Lenard is president of CarrierOne Inc in
1970
MBA Class Champion: Charles Johnston
1965
MBA Class Champion: Cam Fellman
Charles.Johnston70@rotman.utoronto.ca Michael Beamish has nothing new or noteworthy to report except it is great to be living in Calgary, Canadas most vibrant and fastest growing city even if the cost of real estate has accelerated beyond the reach of many. We are looking forward to Spring and golf and gardening and not to another Federal election!
Mississauga.
Bill Richardson is executive VP and CFO at CFS
1971
MBA Class Champion: Chris Ward
Food Source Inc. in Toronto. Gary Wasserman is key account manager at Schenker Logistics in Mississauga.
Cam.Fellman65@rotman.utoronto.ca
1973
MBA Class Champion: George Parker
1966
MBA Class Champion
Chris.Ward71@rotman.utoronto.ca Yves Breton spent most of his career in the trust-
George.Parker73@rotman.utoronto.ca
Class Notes / MBA/Mcom Full- and Part-Time
1974
MBA Class Champion: Hank Bulmash
Hank.Bulmash74@rotman.utoronto.ca Sam Azoory is general manager partnerships & business development for Petro-Canada in Toronto. Paul Hogan is a partner with PricewaterhouseCoopers LLP in Toronto. Elwin Kennedy is retired from Gulf Oil, and is looking forward to the next class reunion. After many years in the industry and in teaching, Ejaz Mian decided to take a PhD and went to the pearl of the orient, Penang Island in Malaysia. It is a marvelous place and all are welcome to visit free hospitality is offered. Ejaz is single again and enjoying life in this paradise on earth, working on research related to small business marketing. Please contact, with thanks and warm regards. Gerhard Schuster (DBA 1974. later MBA at Y ork, 1979) asks, Getting bored with retirement? At 70, Im wrestling with trying to build a tiny designerbrand in a particular bathroom product-niche, based near Berlin, adding roughly one exportcountry per quarter. If you havent read Jean-Louis Servan-Schreibers magnificent A Mi-Vie (Editions Stock, 1977, out of print), may I recommend his new, co-authored Une vie en plus (La longevite, pour quoi faire?), Editions du Seuil 2005, where he espouses, together with a doctor and a sociologist, to keep working! The sociologist explains that average life -expectancy increases by 1 year, every 4 years. Maybe similar books exist in Canada. At 60, I myself used to think Id retire at 65, like everybody else. At 70, it bores me, just to even think of retirement. Of course, an eternal enthusiasm for challenges, the right wife, and good health are essentials. As Sir Laurence Olivier says in his autobiography: It embarrasses me, if Im asked about hobbies. Even in old age, I never know what to reply. Since a lot of people wouldnt understand if I replied My work!, I then answer, Be of service! Thats a good purpose in life. Good luck. Jim Seidewand owns and operates an international PVC (vinyl) materials Marketing/Manufacturing rm. The rm specializes in PVC materials that are used to manufacture PVC pipe, siding, windows, etc. The rm is 11 years old and is considered a leader in its market, with its technical approach. Jim and his family live in the greater Boston area. Both daughters graduated from Boston College, one on a hockey scholarship (a good Canadian) and the older one subsequently took an MBA at Babson College in Boston, despite urgings to consider Univ. of Toronto. The family members are all avid skiers and await a good snow year. Jim sends best wishes to all of the Class of 74 and welcomes their contact.
Keng-Lam Ang has been appointed chairman and CEO of Kerry Properties Limited in August 2003, a company which is listed on the Hong Kong Stock Exchange (Stock Code: 0683). The core businesses of Kerry Properties include real estate investment and development in Hong Kong and Mainland China, third party logistics services with a Pan-Asian focus and infrastructure-related investments. Ted Borek has been named to the Advisory Board of the Rada Institute located in Kiev, Ukraine. Founded in 2005, the organizations mission is to promote services and resources aimed at strengthening civil society organizations in twelve Eurasian countries. Ted is also an Adjunct Faculty in Finance at the School for International Training in Brattleboro, VT. Alan Cooper (DBA 1975) reports that his book, Brain Injury, previously featured in our Fall 2006 issue, is selling well at Indigos/Chapters.
supplying events information to web sites, associations and other clients. Sybil also publishes the Toronto Events Calendar (www.torcalendar.com) a 12 month planning tool for event-planners in southern Ontario. An avid hiker, she has hiked the Grand Canyon, the White Mountains in New Hampshire, Cape Breton Highland National Park, and has trekked in Nepal.
1979
MBA Class Champion Lorn Kutner
Lorn.Kutner79@rotman.utoronto.ca Diego Medina has worked for many years in the design and implementation of business systems. He worked for more than 15 year in the engineering eld assigned in locations in the USA, Latin America, the Middle East and Calgary, Ottawa and Toronto.
1980
MBA Full-Time Class Champion: Frank Hall
1976
MBA Class Champion: Jane Gertner
Frank.Hall80@rotman.utoronto.ca Karen Hoy is an investment advisor at CIBC Wood Gundy in Toronto.
1981
MBA Full-Time Class Champion: William Molson
Jane.Gertner76@rotman.utoronto.ca Rajiv Manucha is president of Management Systems Resources Inc. in Toronto.
1977
MBA Class Champion Judy McCreery
Judy.McCreery77@rotman.utoronto.ca Reunion Alert!

This class is celebrating a banner anniversary on May 31, 2007. For more information and to RSVP, please visit: http://www.rotman.utoronto.ca/alumni/reunion.htm, contact your Class Champion or the Alumni Ofce. Kris Astaphan has recently taken up the role as a venture capitalist, having wrapped up successful careers in Law, Investments and Banking. He is involved in a number of start-up companies in various industries, mainly in Canada and the Caribbean. Kris and Verne are the proud parents of two wonderful young women, Kristi (2nd year at McGill) and Rebecca (Grade 12 at Appleby College).
William.Molson81@rotman.utoronto.ca Bruce La Rochelle continues to develop his wills, estates and corporate law practice at Langevin Morris LLP in Ottawa, a law rm he has been associated with in practice since 2002. He also continues to provide research and legislative assistance to Members of Parliament, a function he has performed on Parliament Hill since 1995. Bruce returned to the academic world in 1999, as a part-time instructor at the School of Management, University of Ottawa, where he primarily teaches nancial accounting and commercial law.
1982
MBA Full-Time Class Champion: Danny Chau
Danny.Chau82@rotman.utoronto.ca
MBA Part-Time Class Champion: Michael Hale
1978
Hugh Larratt-Smith is a managing director in
Michael.Hale82@rotman.utoronto.ca Reunion Alert!

This class is celebrating a banner anniversary on May 31, 2007. For more information and to RSVP, please visit: http://www.rotman.utoronto.ca/alumni/reunion.htm, contact your Class Champion or the Alumni Ofce. Susan (Huebner) Hahnelt works as a quality and reg-
1975
MBA Co-Class Champions: Susan Frank
Susan.Frank75@rotman.utoronto.ca
Robert Johnston
Robert.Johnston75@rotman.utoronto.ca
Triminghams New York ofce. Trimingham is a restructuring and turnaround management rm in New York, London and San Francisco. Hughs six children have attended Harvard, Brooklyn College, McGill, San Jose State U, and St. Marys. Sybil Levine has just launched www.GoFind Events.com, the largest data base of events in Canada (events in over 100 categories and in 400+ cities and towns).The company is in the customized events information business, and is
ulatory manager for Agfa HealthCare, which provides advanced imaging and healthcare Information Technology systems & services for clinical specialties and healthcare facility management. Susan and her husband (Konrad Hahnelt, MBA 84) both travel frequently on
MBA/Mcom Full- and Part-Time / Class Notes
business, but to different continents: They have crossed one-another mid-Atlantic several times in an attempt to have at least one parent at home to forestall their 16-year old sons potential home alone activities. In their spare time, the Hahnelt family enjoys travelling to the Caribbean, Europe, and Central and South America.
1983
Margaret Chan is director at Toronto Rehabilitation
Institute.
Les Czegel has worked at several companies (IBM, Datacrown, Bank of Nova Scotia, CIL, Toronto Star), in the areas of computer design, processcontrol operating systems, system programming, performance management, capacity planning, hardware planning, project management, and general management. In his last real job, at the Toronto Star, besides managing the technology departments, Les was involved in creation of the toronto.com website, the implementation of the Toronto Star TV channel (the first all-digital station in North America), and the introduction of the rst large data warehouse system in Canada. Les was also an independent consultant, helping small businesses maintain and upgrade their computer systems and networking capabilities. Past teaching experience has included the teaching of computer design at the University of Toronto, teaching of computer design, computer usage, and compiler design at various IBM departments, and teaching of computer programming at Humber College. Les joined Seneca College in 1999. He has taught courses in C programming, Unix, and web development. Outside interests include playing and teaching guitar, running a music recording studio, pool, ping-pong, chess, and most sciences. Vincent Ko is vice president, CMRO at SPAR Aerospace in Mississauga.
Lambert, Credit Suisse Financial Services (CS, CSFB & CSPB) and currently with Standard Chartered Bank in Singapore. Happily married with 3 lovely kids and an engrossing work and social life, Balbir sends best wishes to all the class of 85. Rob Redfearn moved to Lumberton NC in 96. He currently co-owns the Black Water Grille a 160 seat bar/restaurant and 300 seat banquet center in the Historic Downtown. He has been developing historic commercial properties and is actively involved in attracting new industry to Lumberton. He is also marketing manager and partner with CRUZBIKE, a new line of Front Wheel Drive Recumbent Bikes, which he is marketing in the US/Canada and abroad. He is barely maintaining his sanity as a single dad with his 2 teenage children, a Dalmatian and a cat in the 100 year old home he is remodelling.
1987
Reunion Alert!
This class is celebrating a banner anniversary on May 31, 2007. For more information and to RSVP, please visit: http://www.rotman.utoronto.ca/alumni/reunion.htm, contact your Class Champion or the Alumni Ofce. Levente Mady joined Man Financial Canadas Vancouver ofce in the fall of 2006. Levente has managed a bond portfolio in excess of $500 million for a local investment counsel. Prior to that, he worked as a xed income trader for major investment dealers such as CIBC Wood Gundy and Deutsche Bank Canada in Toronto. He specializes in providing nancial and risk management solutions to institutions, corporations, and investment advice to high net worth individuals. Specically, Levente is able to offer a wide range of services and products to help organizations and individuals build wealth, enhance operating efciency, and reduce risk. Besides being able to cater to their traditional investments needs such as currencies, bonds, equities, futures and options, he is also able to offer them alternative investments solutions. Levente was a member of Canadas National Swim Team for several years and represented his country at a number of international competitions such as the Olympic Games, World Championships and World University Games. At the present time, Levente is actively involved in the Olympic sport of water polo as a coach, referee and player. Paul Goldman, President and CEO of iTMethods Inc. announced the appointment of Valdis Martinsons as Chief Operating Ofcer of iTMethods Inc. Valdis joins iTMethods executive team with a track record of success as the Chief Information Officer, most recently at Virgin Mobile Canada and prior to that, responsible for Blackberry service worldwide, as CIO of Research in Motion. Previous to being CIO at Research in Motion, Valdis was the senior executive responsible for Information Technology at ATI Technologies and AG Simpson Automotive. Valdis will be responsible for all of iTMethods technology operations and customer services. He will further develop the quality, scalability and overall positive customer experience of iTMethods Managed Infrastructure Services portfolio; including Data Center, Wide Area Networks, Managed Solutions, Hosted Services, Unified Communications Solutions and its planning, engineering, administrative and logistical functions. Im delighted after ten years of knowing Valdis as a customer at both ATI and Research in Motion to have the opportunity to directly work with him. Valdiss extensive industry and leadership experience will bring signicant operational strength to iTMethods. His proven track record for achieving results, along with his management talents, will also be an invaluable addition to the iTMethods Team as we execute our plans into the future, said Paul Goldman. Valdis Martinsons holds a Bachelor Degree in Applied Science and Engineering Engineering Science (Honours Engineering), a Masters Degree in Applied Science and Engineering, (Honours
1986
MBA Class Champion: Roy Turunen
1984
Mark Whitton has left Nortel in Dallas and moved to Virginia to join NII Holdings (Nextel International). Mark is VP emerging technologies and is responsible for expanding NIIs business in the areas of broadband wireless and multimedia. Mark and his wife Lorraine are settled in Northern Virginia and looking forward to exploring the Washington DC area. Adrian Wijeyewickrema is now the manager, sales support for Field Aviation in Mississauga. Thomas Woo is controller for Satisfashion Canada in Scarborough.
1985
MBA Full-Time Class Champion: Gerald Legrove
Gerald.Legrove85@rotman.utoronto.ca
MBA Part-Time Class Champion: Daniel Eng
Daniel.Eng85@rotman.utoronto.ca Balbir Chahal has been in the risk eld for the past 20 years in Bank of Nova Scotia, Banque Brussels
Roy.Turunen86@rotman.utoronto.ca Bob Block is employed by BMO Capital Markets in Toronto on their foreign exchange desk. He has three children; Alicia (b. 1987), Alexander (b. 1989) and Janelle (b. 1991). Sharron McIntyre (Grainger) completed her MBA in 1986. After 20 years in corporate banking and treasury she now consults within the nancial community in Ottawa. As a mother of four, she has also written a book, University Matters that helps students prepare for challenges in transitioning from High School to University. University Matters is available at Chapters and via her web site: www.universitymatters.ca Brian Simpson joined Keyframe Digital Productions as its new CEO. Reporting to Keyframe Digitals founders, Darren Cranford and Clint Green, Simpsons mandate is to assume responsibility for the strategic direction and implementation of Keyframes productions. He will be operating from the head ofce located in Niagara-on-the-Lake, Canada. Clint Green and I are absolutely ecstatic to have Brian join us, enthused Cranford. For the past several years he has been advising us on our legal and business affairs and we were very impressed with his motivation and acumen in strategic design and operational controls. With him on the team, Keyframe Digital Prods. future growth and market positioning as a leader in visual effects and animation is well assured. Simpson earned his MBA at the University of Toronto and garnered his experience in the entrepreneurial sector with First Choice Communications and KristaVision before joining Air Canada. He then moved on to earn his law degree and practice in the commercial litigation arena. Keyframe Digital Prods. Inc. has been operating since 1997 supplying previs and visual effects to such theatrical lms as X-Men, K-19, Secret Window, Driven, Tuxedo, Dont Say a Word and Bulletproof Monk; TV projects include Mutant X, Regenesis, Playmakers, Victor Davis, Crazy Canucks, Solar Attack; and is the producer of Hugglers. Keyframe It is currently supplying all visual effects to The Dresden Files television series for Lionsgate Films and the SCI FI Channel.
Standing), and a Masters Degree in Business Administration all from the University of Toronto. He is also actively involved in competitive and recreational athletics with community based organizations. Anna Tham is chief nancial ofcer at Sinolink Worldwide Holdings Limited in Hong Kong.
Anders Kruus has just started as the CFO of a
1988
MBA Class Champion: Grace Cheung
Grace.Cheung88@rotman.utoronto.ca
1989
MBA Full-Time Co-Class Champions: David Pyper
modest Canadian-run land development firm named Stanton Northwest. Stanton is based in Kirkland, Washington, close to where Anders now lives with his wife and 2 boys. They also spend a lot of time at their second home in Montana, where Anders & Stacey can take the time to give their children appropriate formative experiences. Bob Popadiuk is senior manager, business integration at Acklands Grainger Inc in Richmond Hill.
James Shears is vice president, senior asset manager (Canada) for Citigroup Realty Services in Mississauga.
1992
MBA Class Champion: Blair Kingsland
Blair.Kingsland92@rotman.utoronto.ca Reunion Alert!

This class is celebrating a banner anniversary on May 31, 2007. For more information and to RSVP, please visit: http://www.rotman.utoronto.ca/alumni/reunion.htm, contact your Class Champion or the Alumni Ofce. Daniel Almenara is chief credit ofcer for the Japan, Asia Pacic and Australia region for American Express. He is located in Singapore. Marcia Green is sales & marketing manager for Map Link in Santa Barbara, CA. Piers Hemmingsen is a senior director with CIBC in Toronto. Samky Mak is industry director, nancial institutions, at the Centre for Financial Services, Seneca College in Toronto. Kevin Pinto is senior vice president at Zurich Insurance Company in Toronto. Ron Riesenbach leads the technical services group at Ontario Telemedicine Network Canadas largest and busiest videoconferencing-based telehealth network.
1991
MBA Full-Time Class Champion: David Littlejohn
David.Pyper89@rotman.utoronto.ca
Maria Milanetti
David.Littlejohn91@rotman.utoronto.ca
MBA Part-Time Class Champion: Pamela Kanter
Maria.Milanetti89@rotman.utoronto.ca
MBA Part-Time Class Champion: John Harris
John.Harris89@rotman.utoronto.ca Blair Abernethy is VP and senior technology analyst at Clarus Securities in Toronto. Mark Rippin is the director, technical product management for Algorithmics, Inc, recognized as the worlds leading provider of enterprise risk management solutions. Algorithmics is part of the Fitch Group, a subsidiary of Fimalac, S.A., an international business support services group listed and headquartered in Paris, France. Mark works in Toronto and is happily married with 3 teenagers.
1990
Mattamy Homes Limited announced the appointment of Lucio Di Clemente as Regional President Central Canada. In this role, Mr. Di Clemente is responsible for Mattamys home- building operations in markets throughout southern Ontario. Mr. Di Clemente has a demonstrated history of leadership in service, retail and manufacturing businesses, including Presidential roles at Thrifty Car Rental, MDS Laboratories, Second Cup Coffee and Brewers Retail. An experienced corporate director and advisor for private equity rms, Mr. Di Clemente holds a Bachelor of Business Management degree from Ryerson University, a Master of Business Administration degree from the University of Toronto and a Chartered Accountant designation from the Institute of Chartered Accountants of Ontario. He was a recipient of the 2002 Outstanding Achievement Award for Voluntarism in Ontario and is the Chair of the Board of Directors of the St. Josephs Health Centre Foundation. Recognized as one of the premiere quality home builders in Canada, Mattamy has built over 30,000 homes in the Greater Toronto Area and been annually honoured with quality and satisfaction awards. According to the J.D. Power and Associates 2006 Canadian NewHome Builder Customer Satisfaction Study, Mattamy Homes ranked Highest in Customer Satisfaction with New-Home Builders in the Greater Toronto Area. Dave Hyndman is director, travel and hospitality solutions at T4G Limited in Toronto.
Pamela.Kanter91@rotman.utoronto.ca Sue Barclay is a project manager and independent consultant. After almost 20 years in the corporate world in operations and marketing roles, she returned to university in 1999 to earn an MSc in Information Systems from the London School of Economics. Since then she has worked for clients on a diverse range of information-related projects: she led the development of the rst webbased course offered by a prominent Ontario university, performed a business process redesign of a home care organization and, most recently, worked with BBC World Service Trust to conduct a country-wide pre-election opinion survey in Sierra Leone, West Africa. Sue loves to travel and has been seen recently sailing in Greece, touring the hills of Tuscany and working in her garden in Mahone Bay, Nova Scotia. Gavin Bogle is general counsel for Iovate in Mississauga. Jenny Ho is marketing and channel advisor for Suncorp-Metway in Brisbane, Australia. After much travelling in previous roles with Deloitte and ABB, I am now grounded in Brisbane. I moved to Australia in 2004 to live with my spouse. I would love to hear from friends in Canada. Stephen Lee is assistant general manager at NWS Ports Management in Hong Kong. Helga Loechel is executive lead, internationally educated health professionals initiative for Health Canada in Ottawa. Allen MacCannell establishes sales channels in Europe and Russia. The German and Russian languages helped here. Moscow and Munich are the two money-making cities where most of the sales activity occurs. James McCallum is currently director of engineering for Curtiss-Wright Marine Defense (formerly Indal Technologies). Curtiss-Wright Corporation has a long history with its roots dating back to the Wright brothers rst ight in 1903. Flow Control, Motion Control and Metal Treatment, the three business segments, account for $1.2 billion in sales. Marine Defense is part of the motion control segment and is a major supplier of specialized machinery to aviation and naval users overseas.
1993
MBA Full-Time Class Champion: Daniel Lin
Daniel.Lin93@rotman.utoronto.ca Benedikt Arnason is a vice president Nordic lending in the Nordic Investment Bank in Helsinki, Finland. After a decade working as a director of nancial services at the Ministry of Industry and Trade the Arnason family to move from Iceland to Finland to experience something new. Benedikts wife, Freyja, is currently pursuing her MBA in Helsinki. Their daughters, Laufey (13) and Soley (11) are also having a great time in Finland. Eric Eng has been a credit analyst at DBRS since 1998. DBRS is the largest Canadian rating agency and the fourth largest in the world, with ofces in Toronto, New York, Chicago, London (UK), Paris, and Frankfurt. WestLB AG, Toronto Branch Reaches C$ 1 Billion in Assets WestLB announced that its Toronto branch recently reached C$ 1 billion in assets, along with record levels of upfront fees, revenues and prot before tax. The branch was opened in early 2003 and within just a few years has rmly established itself in the Canadian market. This is a milestone for WestLB, said Alik Kassner, Executive Director and Principal Ofcer of WestLB in Canada. WestLB had to both compete effectively and partner up with major Canadian and foreign banks in order to win deals. We are very pleased that we were able to break into this market and become a valued partner to our clients in Canada
over a relatively short period of time. Aliks wife Anna also recently gave birth to their second child, Coby Liam Kassner. Anna, Alik and big brother Ely are all well and very excited by the new arrival.
Y. Dov Meyer is chief investment ofcer of IPC US
1994
MBA Full-Time Class Champion: Glenn Asano
Glenn.Asano94@rotman.utoronto.ca Glenn Asano is general manager, consumer media China, for Reuters Group, in Beijing. Stephanie Brun de Pontet says Hi all, Just a quick update from the deep South. We are situated in Atlanta, where our two girls are thriving attending the International School here, Robert is well & I am hopefully seeing the light at the end of the PhD tunnel!! My area of expertise is Family Business succession (PhD in psychology) and I hope to work as an expert consultant to closely held businesses in the very near future. Todd James is a manager at HSBC in Hong Kong. Julie Littlechild is president and founder of Advisor Impact, providing practice management training and tools for nancial advisors across North America. She frequently speaks and writes about innovation in practice management. Ms. Littlechild developed the Client Audit, an industry standard for gathering client feedback to improve protability. She also authored the Business Success Kit, a comprehensive guidebook to assist nancial advisors in efcient practice management. Under her leadership, Advisor Impact conducts extensive, on-going research among nancial advisors and their clients. The rm publishes an annual benchmarking report on practice management and also conducts proprietary research among advisors, on behalf of their broker-dealers. A frequent speaker at sales and industry conferences, Julie contributes to a wide range of publications and writes the Client Audit QuickTip, her rms monthly practice management tip for advisors. Julie has worked with and studied top producing nancial advisors for more than 12 years. Julie recently joined AdvisorMax.com, as part of their online coaching staff. AdvisorMax is the rst complete practice management site on the web for nancial planners, and launched November 22, 2006. Sarah Neilson is assistant general manager at CIBC in Toronto. Tom Vassos is an innovation executive with IBM Canada. He also teaches in the MBA program at Rotman. Eva Wrona is head, investment management services for Royal Bank in Toronto.
REIT. With assets of approximately $1.5 billion, the REIT has grown 5 times since its IPO in Dec of 2001. All good things must come to an end as the REIT announced that it has commenced a sale process. So this will probably be a very exciting year. For further details see www.ipcus.com. The Meyers recently welcomed their fth child, Talya. Darlene Varaleau continues to travel the world when she is not harassing drivers who idle their vehicles. Her recent trip to Palenque, Mexico, was part of a medicine journey with the shamanism program she is taking. Lesia Wynnychuck is a doctor of palliative medicine at Sunnybrook Health Sciences Centre in Toronto.
banker in RBC Capital Markets, where she assisted a broad range of clients on corporate nance and mergers and acquisitions assignments. Prior to joining RBC, Ms. Moffat worked as a lawyer in New York and Paris with Shearman & Sterling. She is a member of the New York State Bar. Niki Root is senior director, Chip Program at CIBC in Toronto. Ali Salahuddin recently moved back to Toronto as managing director & global head, equity derivatives trading with Scotia Capital. Jamie Shulman is vice president, digital for Indigo Books and Music in Toronto. Ian Soutter is engineering group manager for General Motors of Canada in Oshawa.
1997
MBA Full-Time Class Champion: Burke Malin
1996
MBA Full-Time Co-Class Champions: Christine Wong
Burke.Malin97@rotman.utoronto.ca
MBA Part-Time Class Champion: Nancy Crump
Christine.Wong96@rotman.utoronto.ca
Suzanne Wilcox
Nancy.Crump97@rotman.utoronto.ca Reunion Alert!

This class is celebrating a banner anniversary on May 31, 2007. For more information and to RSVP, please visit: http://www.rotman.utoronto.ca/alumni/reunion.htm, contact your Class Champion or the Alumni Ofce. James Appleyard is a principal with Artez
Suzanne.Wilcox96@rotman.utoronto.ca
MBA Part-Time Class Champion: Daisy Azer
1995
MBA Full-Time Class Champion: Nick Strube
Nick.Strube95@rotman.utoronto.ca
MBA Part-Time Class Champion: Darlene Varaleau
Darlene.Varaleau95@rotman.utoronto.ca Rose Jin is managing director of Rising International in Thornhill. Kevin Johnston is the president of Madrid, LLC in Tamarac, Florida.
Daisy.Azer96@rotman.utoronto.ca Kathy Butler and David Ferguson and their 2 boys Jackson and Caden are still living happily ever after in Vancouver. Kathy was recently promoted to managing director at CIBC World Markets and David recently joined a software company, Aquatic Informatics, as VP, business development. The boys set the agenda and not surprisingly are full energy: skiers, bikers, gymnasts, swimmers and hockey players. Life goals still involve slowing down, a year in Italy, Machu Picchu, Angkor Wat and the Nahanni River. Junia Freitas is currently director of corporate strategy for Celestica, in Toronto. Junias career has touched many different business areas including sales, technical support, IT, manufacturing, nance, engineering, marketing, global customer management, HR and most recently corporate strategy. Junia is married to Greg, and they have a 3-year old boy named Michael. The Freitas-Manbeck family lives in Toronto, and spends a lot of happy weekends in their cottage near Collingwood. (see picture) Junia has one motto and one strategy for living a rich and fullling life: live with intention and create adventure. Junia sends warm regards to the part time Class of 96, and leaves you with one question: Whats your next adventure in life? Kevin Galazka is ofce manager at Swift Trade in Markham. Iris Lee is a concert pianist and music professor at Chinese Christian College in Taipei. RBC has announced the appointment of Marcia Moffat as Head, Investor Relations. Ms. Moffat brings a diverse background to her new role at RBC. Most recently, she was an investment
Interactive Inc in Toronto, as well as an assistant professor at University of Toronto at Mississauga. Larry Austin is director of operations for BCE in Toronto. Peter Bormann has opened his own law firm, bormannLaww Professional Corporation in Toronto. Don Durno and his wife Jane are proud to announce the birth of their daughter, Isabella Mary Rankin Durno, on Valentines Day. Isabella is a little sister for Lexi. All is well with Don and is in business development at IBM in Toronto. Kim Fobert is senior director and team leader at CIBC in Toronto. Steven Gedeon is a serial entrepreneur and venture capitalist who has founded, turned around and/or led over a dozen private, public, venture capital and nonprofit organizations and has written over 100 publications and patents. He is an active board director and advisor to various organizations including the CEO Fusion Center and AceTech the Academy for CEOs of Technology Companies. Steve was recently CEO of 3DNA Corp., a new media technology company where he raised 5 rounds of nancing and created the number one download in its product category with over 20 awards, 80 magazine articles, dozens of fan sites and over a million users. Dr. Gedeon is a professor of entrepreneurship and information technology management at Ryerson University. His research
interests include analyzing and modelling success factors related to performance of high-growth, technology-based companies. Steve judges the $25,000 Standard Broadcasting Business Plan of the Y ear competition at Ryerson University. Steve also coaches and trains sailing crew at the National Yacht Club aboard his 40 sailboat Progressive. Dini Ntantoulis is vice president at McLean Budden in Toronto. Michael Stewart is director, agency and regulatory affairs for the Ontario Ministry of Energy.
Lenore.Macadam99@rotman.utoronto.ca
Aran Hamilton
2000
MBA Class Champion: Mitchell Radowitz
1998
MBA Class Champion: Mari Iromoto
Mari.Iromoto98@rotman.utoronto.ca Andrea Cauleld has moved with her family to Montreal, where she is working with IBM. Her children (age 2 and 4) are learning to speak French. On the community side of things, Andrea is on the Federal Council of the Green Party of Canada (along with fellow alumna Kate Holloway). Jack Crane works for PG&E Corporation, parent of one of the largest US utilities. Reporting to the CFO, he oversees research and analysis relating to M&A and strategic investments. He and his wife, Meg, a director at LeapFrog Enterprises, have a baby daughter, Molly (born in November). They live in Marin County, north of San Francisco with MeiMei, the worlds friendliest border collie. Mark Downing is an online business senior manager in the Dalian (China) ofces of Dell involved with improving Dells Asia-Pacic websites via usability enhancements and best-of-breed innovations. Noelle Rathee (Yip) is the territory manager, HIV for GlaxoSmithKline in Mississauga. John Shepherd is a portfolio manager with Coutts & Co Investment Management in London. Gregory Smith was recently promoted to vice president with Capgemini, the Paris-based global consultancy of 70,000 employees with which he transferred to Australia in 2004. He continues to focus on consulting to the nancial services industry and recently took on a role as Head of the rms Anti-Money Laundering Practice. Australia is taking a risk based approach to mitigating the threat of money laundering and terrorism nancing, and as such it is emerging as an OECD jurisdiction for other countries to monitor. Banks in Australia will spend an estimated $300 million over the next 3 years to become compliant with legislation passed into law at the end of 2006. Gregory and his wife, Elisabeth, are still enjoying life down under and cant believe 3 years have passed. They have travelled extensively to any area of Australia containing a wine region and there are many! Elisabeth has just accepted a global executive position with Australias largest banks in the area of risk management. Their last vacation took them to Bali for Gregorys birthday; heres a photo of him enjoying the obligatory sunset cocktail served in a coconut shell.
1999
MBA Full-Time Co-Class Champions: Lenore Macadam
Aran.Hamilton99@rotman.utoronto.ca Qin Chen is portfolio manager for Yin Hua Fund Management Inc. in Shenzhen, China. Cindy Dunn is associate vice president, human resources for TD Canada Trust in Toronto. After an extensive national search, Tallahassee Community College has selected Robin C. Johnston as Vice President for Institutional Advancement for the college and the TCC Foundations Executive Director. Mr. Johnston comes to TCC from Randolph Community College in North Carolina, where he served as Vice President for Development and Executive Director of the RCC Foundation for three years. He oversaw RCCs grants development, strategic planning, marketing, and institutional effectiveness operations. As executive director of the RCC Foundation, Johnston focused on building a strong board and developing an annual campaign in support of RCC initiatives. At the same time, he served on the boards of the Randolph-Asheboro YMCA and the University YMCA in Charlotte, where he led a task force that planned the opening of two new facilities. In March he was elected president of the North Carolina Council on Resource Development the states association of community college development ofcers. In addition to his background in education, Johnston is an entrepreneur and a motivational speaker. He quit school to start a courier business at age 17 and sold it at 19, returning to Ontarios St. Lawrence College. Since I got back into a traditional educational path via a community college, he said, I have a special place in my heart and mind for community colleges and the work they do. He went on to earn his Bachelors degree at Lakehead University and his Masters at the University of Toronto, both in business administration. At 24, he was elected to the City Council of Brockville, Ontario. Santosh Kamat and his family (wife and 4-year-old son) moved to New Y ork from Toronto in January 2007. Santosh accepted an interesting and challenging position of director, capital management based in NYC within American Express nance, where he worked for the last 4 years in their Canadian subsidiary. Prior to Amex, Santosh had worked at Capital One Financial Corporation in Richmond, Virginia (USA) and Scotiabank in Toronto, since graduating from the Rotman MBA full-time class in 1999. Santosh loves to play tennis and looks forward to the spring/summer season to start playing the game outdoors in the new neighbourhood, while son and wife also get adjusted to the new preschool and the new locality respectively. Baljit Salh is the president of his own consulting rm, The Caird Consulting Ltd., in Oakville. Hazel Wood is an occupational therapist and owner of Rehab Results Inc. This is a private rehabilitation company that provides assessment and treatment services to employers, insurance companies, lawyers, and private payers. Rehab Results is an afliate member of the Canadian Rehabilitation Network Alliance (CARNA). In my free time, I enjoy skiing, sailing and helping out with the Bone and Joint Decade. Greetings to my MBA classmates!
Mitchell.Radowitz00@rotman.utoronto.ca Michael Cleary is working in debt capital markets at BMO Capital Markets in Toronto. Julie Denton is director, organizational effectiveness at Barrick Gold Corporation in Toronto. Linda Ezergailis is equity research analyst at TD Newcrest in Toronto. Phil Hardie is in equity research at Dundee Securities in Toronto. Julia Hung is nance manager with Procter & Gamble in Boston. Paul Koreen is a vice president with KCI Ketchum Canada Inc. in Toronto. Henry Kwok is senior analyst, global equities at RBS Asset Management in Toronto. Meredith Low and Adam Sadowski are thrilled to announce the arrival of Lily Miriam Low Sadowski on November 1, 2006. Everyone is doing swimmingly in our little family these days. Naturally, Lily already shows great potential to ace her GMAT in approximately 2031. Meredith is still in strategic planning at CIBC (currently on maternity leave), and Adam is president of Domainer Inc., an internet publishing software company. They live in Torontos Queen West neighbourhood. After 6 years in the corporate world, Katherine Magee has returned to her small biz roots and founded greenopolis.ca, a new website that launched in early March designed to make it easier for busy Canadians to live a greener life (and as MBAs, we all know what that is like ). greenopolis.ca contains practical tips and a directory of green goods & services in the GTA. As well, Katherine is the principal of The Magee Resource Group, providing marketing consulting services. Life is busy, but very, very good. Daphne Mao is senior marketing specialist with FedEx Canada in Mississauga. Jim Mylet is now senior product manager at CIBC in Toronto. Miglena Nikolova continues her career at Scotia Capital in Toronto, most recently as a director of marketing. At the present time, she is on maternity leave and busy with raising two lovely twin girls! She and husband Anjelo welcomed Joanna and Beatrice into the world shortly before Christmas Proud big brother Kyrill (13 years old) is happy to help, well, with almost everything Michael Paszti is fully devoted to the pursuit of alternative fuels. He is currently a Six Sigma Black Belt with Maple Leaf Foods, where he led the commissioning team for Canadas rst commercial scale bio-diesel fuel plant, located in Montreal. Michael and his wife Laila recently visited Peru where they made the three day hike to the ancient Incan city, Machu Picchu. They also spent some time at the
southern tip of Chile, in Patagonia. Email mike@paszti.com for more pictures! Michael sends his best to the MBA class of Y2K! Dave Pedersen is director, merchandise nance for Wal-Mart Canada in Mississauga. Yinan Wang is currently in China as technical director for Algorithmics. Algorithmics is one of the worlds leading nancial risk management software vendors, and currently looking to penetrate the Chinese market.
2001
MBA Full-Time Class Champion: Daniel Zinman
Daniel.Zinman01@rotman.utoronto.ca
MBA Part-Time Co-Class Champions: Lisa Sansom
Lisa.Sansom01@rotman.utoronto.ca
Walter Sophia
Walter.Sophia01@rotman.utoronto.ca Raymond Chua is a technical sales advisor for Bell Canada responsible for designing Internetworking and Communications solutions. The Chua family celebrated Mayumi Annes first birthday this March. This second addition to the family just loves to play the piano. Mark Dalby is senior analyst, monitoring and risk analysis for Central Mortgage & Housing in Toronto. Paul Eldridge is director of merchant banking at HSBC Capital Canada, in Toronto. Catherine Graham sent this along: Mark, Catherine and big brother Matthew welcomed James Douglas Graham to the world on December 13th, 2006. Matty, at the wise old age of 2 1/2, is very excited to teach his little brother about the world. Catherine is adjusting to life at home being very outnumbered and can be reached at catherinegraham72@sympatico.ca. Erik Levy is a principal with the CPP Investment Board in Toronto. Barry Shin is vice president, healthcare investment banking at Piper Jaffray in New York City.
2002
MBA Full-Time Class Champion: Rizwan Suleiman
Rizwan.Suleiman02@rotman.utoronto.ca
MBA Part-Time Class Champion: Jay Nicholson
Jay.Nicholson02@rotman.utoronto.ca Reunion Alert!

This class is celebrating a banner anniversary on May 31, 2007. For more information and to RSVP, please visit: http://www.rotman.utoronto.ca/alumni/reunion.htm, contact your Class Champion or the Alumni Ofce. Mansoor Anjum is CFO of Pyramid Petroleum Inc.
Dominion Lending Centres in Vancouver. Paul Choy is now director at CIBC World Markets in Toronto. Elizabeth Daponte is an associate director at Scotiabank in Toronto. Eduard Erbiceanu has recently changed career paths, shifting from the world of management consulting and joining the fast paced nancial services industry, currently working in wealth management with the Bank of Montreal. David Giuffrida is the founder of Adavius Inc. (www.Adavius.com) Adavius offers strategic IT services to lawyers, doctors and other professionals. David practiced law for a number of years before attending Rotman, and serves now as a part-time legal member of the Ontario Review Board, a tribunal created under the Criminal Code of Canada. David lives in Toronto with his wife Laura Hopkins. Laura (also a lawyer/MBA) drafts laws for the province of Ontario and lectures internationally on legal drafting and statutory interpretation. Josh Hunter recently nished a Master of Law degree at the University of Cambridge and is now practising tax litigation with the Department of Justice Canada in Toronto. Ewald Jobst is corporate consultant at Mondi Business Paper in Hausmening, Austria. John MacLean is senior reliability engineer for General Motors of Canada in Oshawa. Priscilla Lau is vice president with the Royal Bank of Scotland, in London. Brian Martin is the vice president of strategy and business initiatives for the International Advisory Group, the full-service brokerage arm of the Royal Bank of Canada. Frank Massey is assistant VP, risk management at Citigroup in Toronto. Hyder Masum is a lawyer with M3 Barristers in Mississauga. Brad Shields and Danielle Shields (Denomy) (MBA 2003) are the proud parents of their rst son, Ryan Nathan Shields, born in Toronto on August 29, 2006. Brad and Dani are enjoying their new role as parents, Ryan is doing well and they wish everyone in the classes of 2002 and 2003 all the best! Adam Siskind is manager at ZS Associates in Toronto. Nicholas Smith is at Barclays Capital in London, working in convertible bonds. Florence Huafeng Wu is an analyst at TD Bank Financial in Toronto.
premium private daycare centre in North York.

Sandra Bernardo is a sales and nancial analyst
2003
MBA Full-Time Class Champion: Pamela Beigel
Pamela.Beigel03@rotman.utoronto.ca
MBA Part-Time Co-Class Champions: Jennifer Chan
in Calgary.
Andrew Bome is a staff lawyer for McQuesten
Jennifer.Chan03@rotman.utoronto.ca
Rajesh Dixit
Legal & Community Services in Hamilton. Matthew Chan is a mortgage expert with
Rajesh.Dixit03@rotman.utoronto.ca Wendy Arnold List is the owner of abc Academy, a
with Bank of Montreal in Vancouver. Chris Calenti is general counsel for Methapharm Inc. in Brantford. In August 2000, Liz Clarke was the rst full-time Professor of E-Business hired at Centennial Colleges E-Business Institute. One of her primary roles at Centennial is the management of the Capstone Projects. These are projects sponsored by external organizations that are designed, scoped and executed by student teams. In January 2003, Liz completed her MBA at the Rotman School of Management, University of Toronto, achieving placement on the Deans List while maintaining a primary focus on the study of e-business/technology strategy and marketing. Lizs business, LizWorks, remains an on-going and active concern, providing consultation in areas related to technology, business strategy and investment, and marketing. In addition to her professional pursuits, Liz remains an active member of the arts community in Toronto, donating her musical, theatrical and management skills towards the production of numerous successful fundraising events. To date, thousands of dollars have been raised for Habitat for Humanity, Friends for Life Bike Rally, and Singing Out!. Lizs working style has been deemed collaborative, consultative, organized and fun. She does try to keep busy. The whole rock star thing didnt pan out as a contribution to making the world a better place, so she does what she can as an instructor, musician, producer/director, business consultant and fundraiser. All in all, its a good gig and is certainly never boring. Steve Cryer is a senior manager in the Toronto ofce of Deloitte. Steve works primarily in corporate and IT strategy within the nancial services industry. Kent Dehnel is director at BC Enertech Ltd in Nelson. DArcy Finley is senior manager, convergence and corporate marketing at Rogers Communications in Toronto. Sara Gelgor is vice president of Advocis in Toronto. Jennifer Gill is business intelligence and development analyst at Boehringer-Ingelheim in Burlington. Dr. Fotios Harmantzis is a member of the Investment Management Research team at FX Concepts, one of the worlds leading private currency managers. A scientist and engineer by training, he is responsible for research and development of systematic trading models for the rms multi-asset portfolios. Besides CTA and global macro, his prior hedge fund experience is in Long/Short (Market Neutral) U.S. equities (fundamentals driven) and Long/Short U.S. credit (capital structure arbitrage). Dr. Harmantzis has extensive research experience in specic areas of nance, operations research and computer science & engineering. His current research interests are in volatility, equity and credit modeling, nancial econometrics, real options, and risk
management. His works have been published in several academic journals, he is a frequent speaker to international conferences and he maintains strong ties with academia. Additionally, Dr. Harmantzis has been appointed a research associate at the Risk and Asset Management Research Centre run by French business school Edhec. Harmantzis has also worked in the risk management group at the Bank of Montreal in Toronto, and as a consultant at Etolian Capital Group in New York, a credit/equity hedge fund manager. His degrees include a Ph.D. in Electrical Engineering from the University of Toronto, a Finance MBA from the Rotman School (U. Toronto) & Stern (NYU), and a Masters in Operations Research from the University of Pennsylvania. The November 4th (2006) issue of London magazine, The Business, named Greg Harris as one of Britains Top 50 Analysts. Greg has been in equity research covering technology companies since just prior to graduating in the Rotman 2003 class. He moved to London in Sept/04 with Canaccord Adams (previous name was Canaccord Capital) to help expand their technology practise and is still there. Bernadine Leung is an associate with RBC Capital Markets in Toronto. Stephanie Ma is manager at EcoTechnologies in Beijing. Shalini Menon is senior manager, business economics at MTS Allstream in Toronto. Aaron Rashba is the major gifts ofcer at the San Francisco Food Bank. Leslie Salmons (Flancman) is vice president at Oakdale Investments in Toronto. Chetan Shah reports a new arrival, My wife Vaishali gave birth to our son Aryan on 19th May 2006. Val Mingming Su is now the group product manager, new product planning, at Wyeth Pharmaceutical in Shanghai. Tracy Tang is audit manager at Volt Information Sciences in New York. Carolina Vargas is a research analyst with Clarus Securities in Toronto. Terrence Wong is director, network transformation for TELUS in Toronto. George Yang sends this wisdom along: Life is a race that I began when I was born, but didnt truly appreciate until I nearly died. The race is about getting it all in. William Wenli Zhao is senior analyst, forecasting at TD Bank Financial Group in Toronto.
2004
MBA Full-Time Class Champion: Maya Lange
Maya.Lange04@rotman.utoronto.ca
MBA Part-Time Class Champion: Steven Lane
Steven.Lane01@rotman.utoronto.ca Michelle Bain is a senior consultant with BMO Financial in Toronto. Arzhang Beheshti is a financial analyst at SmartCentres in Vaughan. Daniel Chau is now the marketing director, Asia
Pacic for Honeywell Security in Shanghai. Tai-Ming Chow is manager, IT services for the City of Mississauga. Joydeep Das is a senior product manager at Sybase Inc, responsible for managing Sybases Business Intelligence product line. Headquartered in Silicon Valley, California, Sybase Inc is one of the worlds largest software companies focused on Information Management. Joydeep and his family have recently moved to Sybases headquarters in Dublin, California. Joydeep sends his best wishes to the part-time class of 2004. Adriane David is a senior consultant with National Public Relations in Toronto. Govind Dharwada is a senior manager at CIBC in Mississauga. Joanne Ellis is manager of integrated business initiatives at TD Waterhouse in Toronto. Douglas Giles is a project manager for the City of Toronto. Wendy Tao Huang is manager, operations support and project management at Scotia Capital in Toronto. Greg Imlah is an associate with Burstall Winger LLP in Calgary. Dessy Jekova is product manager for Sansha, a consumer goods company in Bangkok. Albert Kaan has begun working with Allen Zuo to help start his educational company, BilingoChina International. The company is developing pioneering industry-specic English training for the worlds biggest English training market. David Kang is a business development manager in the Shanghai ofce of Quadra Chemicals Ltd, a leading Canadian chemical distributor. He actually set up the ofce in 2004 and is now the chief rep for China business of this company. Once every 23 months, he comes back to head ofce in Canada and also enjoys time meeting classmates and friends there. David sends his best to the Class of 04 and wishes all a prosperous Y ear of the Pig. Sabrina Li is credit marketing specialist for Belk Inc. in Charlotte, NC. Dan Mader is senior policy advisor to the Honourable John Baird, Minister of the Environment. Dans primary focus is the economics of climate change and environmental regulation. Alvaro Mallarino is a manager with Deloitte & Touche in Toronto. Doron Melnick is a senior associate at RPO Management Consultants. Doron and wife Shana welcomed their second child in January, a beautiful girl named Talia. It has been a challenging experience to help grow a young family and a dynamic company at the same time, but also an extremely rewarding one. Doron looks forward to catching up with everyone at the next class get-together. Myron Moore is senior consultant with Grant Thornton LLP in Calgary. Felipe Papaleo is the vice president of corporate development & sales at Metaca Corporation. Metaca is a leading secure card solution provider located in Concord, ON that services a variety of customers including nancial institutions, retailers, governmental agencies and telecommunications rms. The company offers card production solutions including Smart Cards, prepaid, debit
and credit cards, ID cards, gift and loyalty cards. Metaca Corporation is part of the Secure Products International (SPI) and Felipe was hired from the parent company due to his signicant contribution to Metacas business re-structuring efforts and the overall SPI monetization strategy. Marnie Peters is marketing director for Chatelaine Magazine, Rogers Media, in Toronto. Andrew Phaneuf is program manager at AMD Inc. in Markham. Darrell Pinto is director, global private equity performance for Thomson Financial in Toronto. Shane Pounder is a project manager with the Ontario Ministry of Health and Long-Term Care in Toronto. Chandreyee Saha is senior business consultant at CIBC in Toronto. Janet Shiner sends along, Right after graduating, our fourth daughter was born! I am very busy raising our daughters, ages 12, 9, 7 & 2. I am also working on my business, InHome Financial Services, which specializes in nancial organization. I am married to Norman Shiner (MBA 1992), a director, institutional equity sales at RBC Capital Markets. Ravi Sreedharan is a senior manager, transaction support for Ernst & Young LLP in Toronto. Joshua Su and Lesley Beneteau are happy to introduce Grace Ellen Beneteau Su born on January 25, 2007! Lisha Tang is a business analyst with Organon Canada in Scarborough. George Tolomiczenko is director, research and analysis at Toronto Region Research Alliance. David Woods is manager, revenue and strategic planning for J&J Janssen-Ortho in Toronto. Takashi Yamashita is associate director, originations for GE Real Estate in Toronto. Kevin Haiquan Yang is a nancial engineer in the department of Research & Financial Engineering at Algorithmics Inc. Algorithmics is recognized as the worlds leading provider of enterprise risk management solutions and services that enable nancial institutions to effectively understand and manage their nancial risk. Xinbo Zhu is senior manager, nance controlling for Vishay Intertechnology in Taipei. Alexander Zhukov is director of business development and M&A at Midland Group in Toronto.
2005
MBA Full-Time Co-Class Champions: Fiona Cunningham
Fiona. Cunningham05@rotman.utoronto.ca
Tanbir Grover
Tanbir.Grover05@rotman.utoronto.ca
MBA Part-Time Class Champion: Bob Kapur
Bob.Kapur05@rotman.utoronto.ca Ernest Abraham and Jee Soo Kim were married on October 5th, 2006 at Grace Church-on-the-Hill, Toronto. The reception was held in Hart Houses historic Great Hall, where Ernest and Jee Soo had fond memories of the Rotman MBA Semiformal
in November, 2004. They are moving into a new house in Markham later this year. Ernest and Jee Soo send best wishes to all the Class of 05! Mona Ahmad and Ali Okmen welcomed baby Khadra into their lives on July 14th. Khadra, which means like nature in Arabic, was born at St. Josephs Hospital. Qasim Askari is manager of client loyalty and retention for TELUS in Scarborough. He has recently moved to the North York area and is enjoying the change in environment. Qasim sends his best wishes to all the Class of 05. Gavin Brauer is an account manager at the Business Development Bank of Canada in Toronto. Halli Eidsson is general manager, finance at Dagsbrun Media in Copenhagen. David Elsner is an independent consultant doing business as DHE Consulting in Vaughan. Eli Fattal is a consultant with MRSI Consulting in Toronto. Xuan Feng is a research analyst for HSBC Jintrust Fund Management in Shanghai. Paul Franciosa is a student at law with Goodman and Carr in Toronto. Lindan Gill is senior analyst, strategic analysis at Cadillac Fairview in Toronto. Heather Graham McCourt is a territory representative for GlaxoSmithKline in Mississauga. Tanbir Grover recently joined Sears Canada as a director in the business strategy and improvement group. This new position was celebrated by taking a personal trip to South Africa to better understand the country, the culture and its people. A second trip is being planned for the 2010 World Cup. Tanbir sends his best to the Class of 05 and he looks forward to seeing his Rotman classmates more often now that he is working downtown. Peter Gu is vice president of investment for iD Tech Ventures in Shanghai. Stewart Hayes moved into a new role within HSBC in January 2007. In the newlyformed area of Global ReEngineering, Stewart works to improve the overall operations of HSBC Corporate, Investment Banking and Markets (CIBM), with the end goal of increased sales. Outside of work, Stewarts been enjoying snowboarding, rugby (playing and watching) and all that London has to offer. The rest of his time is spent preparing for his August wedding. As always, pints are ready and waiting for any Rotman alumni visitors to London.
Bhavna Hinduja, Samina Sajanlal and Anusha Shanmugarajah
Charit Katoch is pleased to announce that he married
(pictured here with Saminas sister enjoying the nightlife in Barcelona) continue to build upon the wonderful friendship they started at Rotman. We invite our fellow classmates to join us as we travel the world enjoying many fun adventures, including the Calgary Stampede and Ireland this year!
Mahisha Singh in November 2006. Classmates Leith McKay, Alyson Walker, Willa Hoffmann, Kamal Mahmud, Charles Lesaux and Josef Turnbull represented the grooms side in both Delhi and Jaipur. The happy bride and groom are both in Toronto, where Charit is currently at Rogers Communications as a senior analyst, business development. Sam Kohli is the president of Kohli Appraisers, which offers appraisals and valuations of business assets such as equipment, goodwill and real estate. The company was formed in 1978. Sam leads a team of appraisers and consultants and has a strong presence amongst the major nancial institutions, lawyers, accounting rms, Revenue Canada, etc. Sam is still single and lives in Mississauga. Since (and during) graduation, Sam has been extremely busy growing the company and travelling to different locales. He wishes everyone the best, and is always open to class reunions whenever they are held in the Toronto area. Bannon Kopko is vice president of institutional sales with Merrill Lynch Canada in Toronto. Marcus Lam is associate director of strategic planning for operations nance at Bell Canada in Montreal. Tom Lam is an investment banking associate, Asia rates markets, for JP Morgan in Hong Kong. Kamal Mahmud moved back to his hometown of Moncton after graduation to start his own real estate development rm. Kamal is happy to say that he has completed a few projects and is well on his way to becoming a real estate mogul on the East Coast, and is looking for his own Apprentices. He is also pleased to announce his marriage to Saira in August of 2006. Strahan McCarten and Heather (Sifton) McCarten were married on September 30th, 2006 at the McMichael Art Gallery in Kleinburg, Ontario. They took a four-week honeymoon to Tanzania, where they enjoyed a safari, some time on the beach, and a successful climb up Mt. Kilimanjaro. They look forward to catching up with fellow Rotman alumni in Toronto. Mary Monaghan was married on October 14, 2006 in Toronto to Jeremy Amin, who was her support system throughout her MBA. In January 2007, she left her sales career with Johnson & Johnson Medical Products Canada to move to Dubai, U.A.E following a placement for her husband with GE in the Middle East. Through networking shes been able to maintain her position with J&J in Dubai, and the sunshine is treating her well. Mary sends all the best to her fellow classmates and encourages them to contact her if they are ever in her neck of the woods! David Nixon is manager of nance and human resources at the Magnes Group in Oakville.
Chris OBrien is manager of sales and marketing for Avalon Microelectronics in St. Johns. Peter Oskolkov is an associate director with Bell Canada in Toronto. Kena Paranjape is a merchandiser with Gap Inc. in San Francisco. Dr. Antoine Pronovost is a critical care fellow at the University of Toronto. Samina Sajanlal is an associate in hedge fund investments at Northwater Capital in Toronto. Liping Alicia Sun is director of nance and administration for AgraPoint International in Kentville, NS. Heng Tan is deputy general manager for United Win Holding Ltd. in Beijing. Wendy Tsang is manager of retail product communications for RBC Asset Management in Toronto. Kedar Tupil is a senior consultant at PSTG Consulting in Toronto. Kaiyin (Katherine) Xie is a senior assistant manager at Scotiabank in Toronto.
2006
MBA Full-Time Co-Class Champions: Bill Fox
Bill.Fox06@rotman.utoronto.ca
Paul Nagpal
Paul.Nagpal06@rotman.utoronto.ca
Paul Forma
Paul.Forma06@rotman.utoronto.ca
Shrutie Owerie
Shrutie.Owerie06@rotman.utoronto.ca
MBA Part-Time Class Champion: Ushnish Sengupta
U.Sengupta06@rotman.utoronto.ca Sharon Aba is a senior manager with Deloitte Israel in Tel Aviv. Maher Al Jallad is a project coordinator for risk insurance and reinsurance in Beirut. Sacha Alimchandani is an associate with GE Energy Financial Services in Calgary. Nelson Amaral is the marketing analyst for two recent acquisitions at The Home Depot: Brafasco and CTF Supply. He recently moved from the west end of the city to the Danforth with his wife and two children. Jessica Anaya is a sales representative for Merck Frosst in Toronto. Ateeq Mohammad Bandukda is a director for AlAmeen Denim Mills in Toronto. Gord Bennett is in business development at TELUS in Scarborough. Kenji Blanco Matzuno is manager of internal ratings for Scotiabank in Toronto. Jason Bulgin is an analyst with Accenture in Toronto. Travis Callahan is director of nance, pharmacology, for MDS Pharma Services in Seattle. Nicole Chan is a senior nancial analyst at Rogers Communications in Toronto. Rob Chang recently represented Canada at the World University Dragon Boat Championships as the coach of the University of Torontos University College Water Dragons. The team did UofT proud with a 3rd overall placement. Dan Sorin Comanici is senior fund accountant at Mount Sinai Hospital in Toronto. Anthony Di Carlo is manager of strategic initiatives
in the Ofce of Strategic Management at BMO Financial in Toronto. Ayman Eid is a senior consultant with Deutsche Post World Net in Bonn, Germany. Julio Fournier is a nancial analyst at ConAgra Foods Canada in Mississauga. Holland Grant is listings manager for the Bahamas International Stock Exchange in Nassau. Amanda He is an equity research associate with BMO Capital Markets in Toronto. Kenny He is an associate, investment banking, M&A for BMO Capital Markets in Toronto. Lilia Ioannidou is an analyst with Calyon Investment Bank in London. Ranju Jha is human performance improvement manager for American Electric Power in Columbus, OH. Pravin Kelkar is business development manager at Inforica, one of the fastest-growing IT consulting rms in Canada. Ryan Lavallee is spending most of his time in London (UK), New York, and continental Europe serving as a partner in a multijurisdictional private equity group specializing in capital under management. He also occasionally practices as a New York attorney. However, he has adjusted to the continental business schedule and tries to avoid working more than 20 hours per week. Accordingly, Ryan is, for the moment, technically semi-retired. His leisure activities include laughing, getting lost in the hills surrounding coastal European villages, buying shoes, and spending the hard-earned money of his friends and enemies on SuperTuscan wine and ossobuco alla milanese. Eleonor Lee is a sales and marketing analyst in the Mississauga head office of Ingersoll Rand Security Technologies. She never expected to be in the construction/door hardware industry, but now that she is, she enjoys the chance to work on a variety of initiatives from marketplace analyses, to pricing management to channel development. She looks forward to the summer maybe shell join a dragon boat team and enjoy the beautiful lakeshore in Port Credit. If youd like to chill out (in the area or elsewhere) or are looking for an activity partner, give Eleonor a call! Ferris Lee (MBA Exchange 2005) is an assistant to the managing director in a consumer goods trading company, where he is dedicated to corporate workow management and marketing strategy. Ferris is also a Feng Shui and Face Reading consultant, and is studying whether the traditional Chinese calendar can help foretell economics trends and uctuations. Al Leong is a management consultant working out of Toronto and New York. The biggest change is that I got a lab pit-bull cross, Sarah. Shes 2.5 now. Shes my little girl I got her from the Humane Society in August 2006. She likes people, eats Brie and pate, and has learned to burp. On the work front, Ive set up ofce on my own; I wish I had a corporate job like most of you folks. But, alas, I am currently working out of BCE
Place / Bay St., downtown Toronto, (sharing ofces with Google, Y ahoo! and British Airways), and on Wall St. in NYC (down the street from Donald Trump hes not a nice person). Purchased a condo downtown at the waterfront and thinking about returning to Vancouver and then opening in London, UK as next steps. Looking to build some good teams and working with old friends and, having fun. Stay in touch! Katrin Lepik is a partner with Mukodu Inc. in Toronto. Philip Loong is costing engineer for Spin Master Ltd. in Toronto. Qun Lu is associate product manager for Abbott Laboratories in Mississauga. MaryAnn Matthews is a senior mutual fund analyst at TD Asset Management in Toronto. Quinn McLean is an investment analyst with Sky Investment Counsel Inc. in Toronto. Sky specializes in the management of EAFE (Europe, Australasia and Far East) equities and has over $2.8 billion in assets under management. Quinn began his career in public accounting with Smith Nixon & Co. LLP in Toronto. As a senior staff accountant, his job duties were primarily in auditing of manager owned businesses and small public companies as well as reviewing personal tax returns. He completed his Chartered Accountant (CA) designation in 2004. Quinn interned at Sky Investment Counsel during the summer of 2005 before joining full-time in July 2006. Arvind Mirtipati is assistant technical advisor for USAID in Niagara Falls, NY. Zorik Nizan is an associate with Managerial Design in Oakville. Uzo Ofoma is manager of offshore accounts at Ofoma Enterprises in Port Harcourt, Nigeria. Wenbo Pan is area director for China with the Ontario Ministry of Economic Development and Trade. Jeffrey Pootoolal is a director at Drug Royalty Corp in Toronto. Felicia Predie is an analyst with Orientex Industries Inc. in Toronto. Chris Rocha is senior solution manager at Canadian Tire in Toronto. Arjun Sarkar is a business consultant with Oracle in Mississauga. Paola Silli is the conservation and development coordinator for HydroOne in Toronto. Laurel Sutton is a consultant with Accenture in Toronto. Jose Vergara is audit manager for Scotiabank in Toronto. Robertson Velez is staff engineer with ATI Technologies in Markham. Leeat Weinstock is an analyst with Capital Canada Ltd in Toronto. Derek Yu is a lawyer with Harris + Harris LLP in Mississauga. Joseph Yun is an associate with Ernst & Young in New York. Raina Zhao is manager, reporting and control, securitization nance and operations at Bank of Montreal in Toronto.
EXECUTIVE MBA
Reunion Alert!
All EMBA classes in honoured years i.e. those that end in either a 2 or a 7 are invited to return to the Rotman School on May 31, 2007, to celebrate Reunion 2007. For details, contact your Class Champion(s) or Michelle Zathureczky, Manager, Volunteers and Reunion Coordinator at (416) 946-3665. You can also visit http://www.rotman.utoronto.ca/alumni/reunion.htm
1985
Class Champion: Bob White
Bob.White85@rotman.utoronto.ca EMBA 1 at the TSO: Last November, following a superbly-executed dinner in the Azure Room at the Toronto Intercontinental Hotel, EMBA I members attended the TSO Concert Goodyear Plays Mozart. The quiet feature was that Teng Li, Principal Viola, played the solo part in the performance of Berlioz Harold In Italy. From the program: Teng Li performs on an Amati Viola, on loan from Dr. William Waters to the TSO. More on the program at: http://www.tso.ca/ season/ticket/calendar_perform.cfm?ID=373. (Thanks to Jim Courtney for the story and photos). Jim Courtney has been involved with new developments in real-time communications covering voice, instant messaging and the introduction of these technologies to both consumers and businesses. He currently is associate editor of Skype Journal (http://skypejournal.com) and brings 10 years experience with Voice-over-Internet technology as well as over 30 years experience managing high technology business operations.
1987
Class Champion: Vitor Fonseca
Vitor.Fonseca87@rotman.utoronto.ca Reunion Alert!

This class is celebrating a banner anniversary on May 31, 2007: for more information and to RSVP, please visit www.rotman.utoronto.ca/alumni/reunion.htm, or contact your Class Champion or the Alumni Ofce. Harold Redekopp is a broadcast media consultant
with Amherst Media Consulting in Toronto.
1988
Property One Consulting Inc. recently welcomed Rob Lowry to the team as general manager for Ontario. Rob is responsible for implementing best in class industry practices with regard to fairness mandates, alternative service delivery and public-private partnerships. Several years ago Rob left a successful career in the Ontario Public
Executive MBA / Class Notes
Service to apply his senior management experience through Bay Consulting Group in Toronto. In the Ontario Realty Corporation he held the position of Executive Vice-President for Property Development, and led the project team for the transformation of this provincial agency. P1 Consulting, founded in 2000 with headquarters in Ottawa, has become a recognized leader in the development and application of contemporary public-procurement practices. The rms clients include the City of Ottawa, the City of Toronto, Infrastructure Ontario, Indian and Northern Affairs, Public Works and Government Services Canada, and the CBC. Don Wiles is the president of Advanced Seating Systems Technologies Inc., which produces custom seating for individuals who drive for long periods of time. The goal is to provide excellent vertical and lateral support to the driver and minimize the potential for time off the job due to muscle fatigue or skeletal stress.
ALUMNI DISPATCH
WHATS UP DOWN IN MEXICO?
1989
Co-Class Champions: Peter Murphy
Peter.Murphy89@rotman.utoronto.ca
Bill Brown
By Claudia Avila Connelly
Bill.Brown89@rotman.utoronto.ca
Executive Director Mexican Association of Industrial Parks (AMPIP) EMBA 96
1990
Class Champion: Jeffrey.Wayne
Jeffrey.Wayne90@rotman.utoronto.ca Jeffrey Wayne is the vice president, sales and marketing for Dr. Reddys Laboratories Inc. in Bridgewater, NJ. Ben Wong is executive vice president, transportation and logistics services for Livingston International in Toronto.
1991
Anthony Ko is senior project manager for Cheung
Kong Infrastructure Holdings Limited in Hong Kong.
1992
Reunion Alert!
This class is celebrating a banner anniversary on May 31, 2007: for more information and to RSVP, please visit www.rotman.utoronto.ca/alumni/reunion.htm, or contact your Class Champion or the Alumni Ofce. Andy Gizbert is managing partner with C Care
Solutions in Dallas.
Pat Harmon is an executive coach
and consultant in Rye Brook, New York. Richard Lawrie is a sales manager with WPS Disaster Management Solutions, developing site-specific multi-hazard emergency response programs for property clients. See www.wps-plan.com for more details. Its been an exciting year for the Lawrie family, welcoming a
I wonder how familiar EMBA alumni are with Mexico. Who can forget that study tour to Monterrey! Well, after working for 16 years in the Government sector, Ive now changed my direction by joining the private sector, even though my responsibilities are still related to what I was doing before: international business promotion. The Mexican Association of Industrial Parks (AMPIP) is a business organization created in 1986 to represent the interests of the most prominent industrial developers of Mexico, and at present, the association comprises more than 50 member companies, who own approximately 170 industrial parks, with a total amount of 17,000 hectares of land, half of which are already developed, with more than 2,000 multinational companies established there. Let me share with you some data about my industry. President Felipe Calderon has initiated his efforts to negotiate the necessary agreements with the Congress and State governments for the implementation of new economic policies to streamline the public spending and to resolve the ongoing energy, labor and tax reform debate. The perspective of the private sector is that Mexicos macro-economic environment will continue to be stable and comfortable. Although the country faces the challenge of maintaining sustained growth
despite the volatility of oil prices and the deceleration predicted in the United States, it is expected that the Mexican economy will accomplish a moderate growth of 3.4% rate at the end of 2007, with an average ination rate of 3.5 per cent and stable interest and exchange rates. In this context, one of the main priorities of President Calderon will be the development of new infrastructure projects, especially in highways, ports and energy, for the next few years, a plan that if it is well managed, will allow a boom in new investments, especially in industrial parks. During the last decade, Mexicos industrial model has been focused on promoting high technology manufacturing, combined with logistics services to better access the U.S. market. Besides, the Mexican government is betting on more educational resources. As a result, many foreign manufacturers are moving their high-tech production into Mexico to balance the China risk. According to the Mexican Ministry of Economy, during the first ten months of 2006, foreign direct investment into Mexico was around $14.1 billion dollars and it is predicted that the amount for 2007 will increase to 15.9 billion. In the same period, the Mexican Institute of Statistics (INEGI) registered a 5.4% increase of the industrial activity in relation to the previous year, being the construction the most dynamic sector, followed by manufacturing and electricity. The opinion of experts is that the main factor boosting this new technological trend is the condence in the country. Multinational companies perceive that Mexico is being more efcient to host higher added value projects, meaning a new demand and higher standards of industrial buildings and more efcient logistic services. The necessity to cutback overhead costs, the global integration of supply chains and the increasing demand of U.S. consumers will mean for Mexico an increasing opportunity to stimulate new direct foreign investment projects. As some experts have said, the idea is to take advantage of Mexicos strategic location and the increasing US demand for manufactured goods for the location south of the border, of new manufacturing plants in specic sectors such as automotive, electro domestics and aerospace, among others, as well as distribution operations for just-in-time operations. Hence, Mexicos economic perspectives for the near future are very attractive.
Class Notes / Executive MBA
black lab pup into our world. Daughter Erin graduated BSc New Media, and son David started his career as a contractor. Debbie continues with her life saving career in the eld of cancer treatment and research. Richard sends his best wishes out to his class mates, many of whom are retired or considering retirement in the near future. Enjoy your life long passions! Chris Mahoney is an executive with Exxon Mobil Corporation in Fairfax, VA. Paul Saabas is now a principal with PMJ Consulting in Aurora.
Reunion Alert!
This class is celebrating a banner anniversary on May 31, 2007: for more information and to RSVP, please visit www.rotman.utoronto.ca/alumni/reunion.htm, or contact your Class Champion or the Alumni Ofce.
Cheryl.Paradowski02@rotman.utoronto.ca Reunion Alert!

This class is celebrating a banner anniversary on May 31, 2007: for more information and to RSVP, please visit www.rotman.utoronto.ca/alumni/reunion.htm, or contact your Class Champion or the Alumni Ofce. Padma Kamath is the solution program manager at Alcatel-Lucent in Mississauga.
1998
Class Champion: Ashok Sharma
Ashok.Sharma98@rotman.utoronto.ca Fabio Almeida is commercialization manager with Innovations at University of Toronto. Douglas McLean is director of operations at Halendas Fine Foods Ltd in Oshawa.
2003 (EMBA19)
Class Champion: Jennifer Figueira
1993
Class Champion: Andy Hofmann
1999
Co-Class Champions: Mo Mauri
Andy.Hofmann93@rotman.utoronto.ca Heather LaRose is VP finance for JuneWarren Publishing Ltd in Edmonton.
Mo.Mauri99@rotman.utoronto.ca
Desmond Preudhomme
1994
Class Champion: Andrew Stewart
Andrew.Stewart94@rotman.utoronto.ca
Desmond.Preudhomme99@rotman.utoronto.ca Paul Fitzgerald is director of operations for Moosehead Breweries Ltd in Saint John, NB. Craig McLennan has returned from France to Waterloo (ON), and is now the vice president, CDMA business unit for Research in Motion.
1995
Class Champion: John Ramdeen
2000
Co-Class Champions: Jennifer McGill-Canu
John.Ramdeen95@rotman.utoronto.ca Deborah Swail has decided to leave Scotiabank after 31 successful years in a widely varied career. While not an easy decision to make, it was time to move on and pursue other interests. Deborah and her husband, Jim Stewart (also EMBA 95) recently moved into the city of Toronto. Deborah will take a few months off to travel a bit, relax, and most importantly, spend time with her family and friends. Following that, she is planning to search for something new to do maybe go back to school, get more involved in a charitable organization or perhaps join Jim in his business, ProtPath. Deborah sends greetings to the EMBA class of 95. Dont be surprised if you hear from her as she explores her next career moves.
Jennifer.McGill00@rotman.utoronto.ca
Bruce Lawson
1996
Co-Class Champions: Jon Waisberg
Jon.Waisberg96@rotman.utoronto.ca
Carmine Domanico
Carmine.Domanico96@rotman.utoronto.ca Michael Bloom is national sales manager, software for Dell Canada in Toronto. Gordon Hayes is director, insurance risk for the Bank of Montreal in Toronto. Caroline Hogwood is VP dealer nance & administration for Canadian Tire Corporation in Toronto.
Bruce.Lawson00@rotman.utoronto.ca Rob Gerden recently relocated to sunny Phoenix, Arizona to join Wells Fargo Bank as VP of their Information Compliance and Risk Management group, where he oversees information security, records and technology management and business continuity. The Gerden family [wife Renee, Emma (6), and Jack (4)] has enjoyed the transition (especially during the winters!) with visits to such places as the Grand Canyon and of course, Disneyland, which are all within six-hour drives. In fact within two hours alone, one can go from 80 degrees to skiing up in the northern Arizona mountains due the higher elevations. We have not forgotten our Canadian roots; I must admit that one of the early challenges was not having my daily Tim Hortons coffee. Rob sends his best wishes to the Class of 00 and can be contacted at robert.j.gerden@wellsfargo.com Lisa Richter Davey is senior manager, risk policy for RBC Royal Bank in Toronto.
Jennifer.Figueira03@rotman.utoronto.ca Suavi Arslan is risk manager at RBC in Toronto. John Domen is director of procurement, planning and Logistics for Messier-Dowty in Ajax. Gregor Grant is the general manager of Greenwin Tennis Club in Toronto. Jean Hennessey reports, This year I am taking an early retirement from Canada Post so I can spend more time with my grandchildren. I will always remember the EMBA Program and my fellow classmates. Mike Keefe is director of sales and marketing at Turbomachinery Products in Chandler, AZ. Chase Pense is a principal at Lewis Builds Corporation in Toronto. John Pozios is the founding director of the Marcel Desautels Centre for Private Enterprise and the Law at Robson Hall, University of Manitoba. See http://umanitoba.ca/faculties/law/newsite/index.ph p for details. John continues to advise private businesses in connection with corporate nance matters. Most importantly, he and Jennifer recently welcomed their rst child, Jack, on April 6, 2006. Saied Babaei is director of corporate affairs for Lorus Therapeutics Inc. in Toronto.
2003 (EMBA 20)

Co-Class Champions: Andrew Jenkins
Andrew.Jenkins03@rotman.utoronto.ca
Maria Lundin
Maria.Lundin03@rotman.utoronto.ca Susan Walsh is director of quality and performance measurement at Mount Sinai Hospital in Toronto. Scott Wambolt is senior vice president of sales for Yellow Pages Group in Toronto.
2001
Co-Class Champions: Ken Hagerman
2004
Co-Class Champions: Fariba Anderson
Fariba.Anderson04@rotman.utoronto.ca
Paul McKernan
Ken.Hagerman01@rotman.utoronto.ca
Gary Ryan
1997
Class Champion: Jennifer Hill
Gary.Ryan01@rotman.utoronto.ca
2002
Class Champion: Cheryl Paradowski
Paul.McKernan04@rotman.utoronto.ca Paul McKernan is an account executive at ADT Security Services Canada in Mississauga.
Jennifer.Hill97@rotman.utoronto.ca
OMNIUM / GEMBA (Global Executive MBA) / Class Notes
2005 (EMBA22)
Class Champion: Michele Henry
2006 (EMBA25)
Class Champion: Rob Ljubisic
Miguel Angel Lopez is the CFO of Siemens AG Automation and Drives, in Nuernberg Germany.
2001
Co-Class Champions: Margaret Evered
Michele.Henry04@rotman.utoronto.ca Heather Gates-Hack is marketing manager for Fishery Products International in Concord, ON. John Pierce has been appointed senior vice president, human resources and labour relationsOntario with Loblaw Companies Ltd. In his new role John oversees human resources and labour relations for approximately 50,000 employees across all corporate and franchise store locations in the Ontario market. Paul Sacco recently moved to Calgary to take a position in Petro-Canadas Oil Sands Marketing and Development group. Prateek Saxena is now manager, program design for Ontario Power Authority in Toronto. Mark Steele is regional manager for ATG. based out of Toronto. ATG (Art Technology Group, Inc., NASDAQ: ARTG) makes the software that the worlds top brands use to power their leading-edge web sites; attract prospects; convert them to buyers; and offer stellar ongoing customer care. Mark and his wife are still in the newlywed phase and have been enjoying their time together travelling the world. They most recently spent a couple of weeks in China visiting with fellow EMBA alumni in their home town of Shanghai. Mark sends his best wishes to the class and looks forward to catching up at the next monthly pub night.
Rob.Ljubisic06@rotman.utoronto.ca
2007 (EMBA 26)

Class Champion: Serge Messerlian
Margaret.Evered01@rotman.utoronto.ca
Renald Hennig
Renald.Hennig01@rotman.utoronto.ca
Serge.Messerlian07@rotman.utoronto.ca Steve Gruber is a partner with Venture Accelerator Partners in Grimsby, ON. Andrew Morgan is a Salvation Army ofcer and for the past four years has been responsible for The Salvation Army Toronto Harbour Light Corps. Andrew served for eight years in Budapest where he had the unique opportunity of participating in the re-establishment of the Armys work in post-communist Hungary. Before joining the Salvation Army, he worked for three years with the Government of Ontario and before that in the private sector all in the risk management eld. In addition to his MBA Andrew holds a Business Diploma in Paralegal Technology, a Canadian Risk and Insurance Management designation, a Bachelor of Arts degree in Biblical and Theological Studies. He and wife Darlene, who is also a Salvation Army ofcer, have been married for 18 years and have two children, Nathan (12) and Paul (6).
2002
Co-Class Champions: Manfred Koo
Manfred.Koo02@rotman.utoronto.ca
Petra Cerhan
Petra.Cerhan02@rotman.utoronto.ca Reunion Alert!

This class is celebrating a banner anniversary on May 31, 2007: for more information and to RSVP, please visit www.rotman.utoronto.ca/alumni/reunion.htm, or contact your Class Champion or the Alumni Ofce. Ian Chan is a senior manager with Deloitte in
Toronto.
Rob Hahn is the president & CEO of Orbit Group Partners, one of Canadas leading consulting providers to the call centre industry. Recently, Orbit has brought to the marketplace an integrated performance management solution that has delivered signicant improvement in operational effectiveness for their customers. Rob has a fantastic family that he is blessed to be a part of each and every day! Best wishes to EMBA 2002 and my fellow U of T grads. Winston Hao is senior VP, China, for DMX Technologies Group in Beijing.
OMNIUM / GEMBA (Global Executive MBA)

Reunion Alert!
All OMNIUM/GEMBA classes in honoured years i.e. those that end in either a 2 or a 7 are invited to return to the Rotman School on May 31, 2007, to celebrate Reunion 2007. For details, contact your Class Champion(s) or Michelle Zathureczky, Manager, Volunteers and Reunion Coordinator at (416) 946-3665. You can also visit www.rotman.utoronto.ca/alumni/reunion.htm
2005 (EMBA23)
Co-Class Champions: Karen Sparks
2003
Co-Class Champions: Michal Berman
Karen.Sparks05@rotman.utoronto.ca
Joyce Rankin
Michal.Berman03@rotman.utoronto.ca
Susanne Justen
Joyce.Rankin05@rotman.utoronto.ca Emad El Hamahmy is vice president, product management for Xeye Incorporated in Mississauga.
1998
Class Champion: Lan Nguyen
2006 (EMBA24)
Co-Class Champions: Elizabeth Duffy-MacLean
E.DuffyMaclean05@rotman.utoronto.ca
Linda Jussaume
Linda.Jussaume05@rotman.utoronto.ca Jennifer Lee is senior associate director, Sympatico marketing and product development at Bell Sympatico in Toronto. Shirley Malloy is national manager, private banking for TD Waterhouse in Toronto. Randy Stafford is manager of operations, valuation and advisory services at Capital Markets Group for Cushman & Wakeeld LePage Inc. in Toronto. Corrado Tiralongo is a portfolio manager with ScotiaMcLeod in Toronto.
Lan.Nguyen98@rotman.utoronto.ca Bernhard Gabel is an in-house lawyer and a managing director of ArcelorMittal in Germany the biggest steel producer in the world, with headquarter in Luxembourg and more than 12,000 employees in Germany. For more info, see: www. arcelor.com Bernhard wishes all the best to the GEMBA Class of 98!
Susanne.Justen03@rotman.utoronto.ca Susanne Justen is head of consumer service EMEA for Abbott Diabetes Care in Wiesbaden, Germany. Martin Reichmann has his own consulting practice, Martin Reichmann Consulting, in Stuttgart. Philip Uglow is project manager on Nordic 1, working for BP Exploration in Prudhoe Bay Alaska. Andreas Vollmer is senior manager at CONTEXT Management Consulting in Bad Homburg, Germany.
2004
Co-Class Champions: Ralf Martinelli
1999
Class Champion: Jim Coutts
Ralf.Martinelli04@rotman.utoronto.ca
Brent Furneaux
Jim.Coutts99@rotman.utoronto.ca
2000
Class Champion: Nancy Dudgeon
Brent.Furneaux04@rotman.utoronto.ca Viktor Sigl is head of corporate tax and finance advisory with VoestAlpine AG in Linz, Austria.
Nancy.Dudgeon00@rotman.utoronto.ca
Class Notes / MBA (Accounting) / Master of Management & Professional Accounting
2006
Class Champion: Cecilia Mueller-Chen
1991
Isabel Chapman is a research manager with IDC in
for Xstrata Canada in Toronto.
Toronto.
1999
Class Champion Jamie Ferguson
C.MuellerChen06@rotman.utoronto.ca Luiz Carlos de Sousa is the senior consultant leading the alternative fuels and raw materials (AFR) business development for Holcim in its operations in Spain, the Mediterranean and Africa. Holcim is one of the worlds leading suppliers of cement and aggregates; see www.holcim.com/afr for further details). The de Sousa family recently welcomed its third son, Lus Fernando, and sends greetings to all of the 2006 Omnium class. Susan Knoerr is managing CESL Operations for Teck Cominco Ltd. CESL has developed pressure leaching technology for copper and nickel that can be more economical than smelting. Susan and Lee are enjoying the move to Vancouver and hope some of our classmates have a chance to visit us in this beautiful city. Erwin Locher is CEO of Nexatio AG in Basel, Switzerland. Spiros Margaris works at Crossbow Advisors AG in Zurich a rm that specializes in managing hedge fund portfolios for family ofces and banks. Julie Tan is a planner with Bootlegger, in Richmond, BC.
1992
Reunion Alert!
This class is celebrating a banner anniversary on May 31, 2007: for more information and to RSVP, please visit www.rotman.utoronto.ca/alumni/reunion.htm, or contact your Class Champion or the Alumni Ofce. Jordan Hermant is the president of Zedware, a small business IT consulting rm, and recently opened up a new division to concentrate on new digital home technologies. Jordan has one son and twin girls. He spends 3/4 of his time at work, and the other 3/4 of his time with his family. Consequently, he can get quite tired, but enjoys it very much.
1993
Artie Ng is the principal consultant and managing
2007
Co-Class Champions: Dirk Lohmann
director for Securac China Ltd., which delivers enterprise risk management systems and risk governance solutions to large organizations in Hong Kong and China, including state-owned enterprises and listed companies. Artie recently completed his PhD at the University of Glasgow, with a research focus on performance measurement and intellectual capital. He resides with his family in Hong Kong and travels frequently to China. He wishes all the best to his classmates and most important of all, good health!
Jamie.Ferguson99@rotman.utoronto.ca Tariq Ajmal is senior manager with Deloitte in Abu Dhabi. Chris Bellerby has been a manager/senior manager with TELUS since 2004 in a reporting and controls/compliance role. I managed SOX 404 implementation for the wireless segment and support the Consumer Solutions segment nancial reporting and control requirements. Lori and I have a baby girl, Hannah, [were] expecting our second in Feb07. I am still running set my personal best in the marathon last fall (06) in 2:46. Hello to all, and I look forward to seeing you at our next reunion. Milena Bucan Ernjakovic is controller at Hyundai Canada in Markham. Lisa Caputo (Sacco) is compliance ofcer at the Mutual Fund Dealers Association in Toronto. Jamie Ferguson is a senior tax manager with Wolrige Mahon LLP in Vancouver. Fred Jheon was recently promoted within Barclays Global Investors from investment strategist to portfolio manager, and now manages 14 sector portfolios with assets of over $9 billion. Elaine Li is working in the mobile phones division with Philips Consumer Electronics in Hong Kong. Dave Mun is senior manager, investor relations at RBC Financial in Toronto. Jason Wein is senior audit manager at RSM Richter LLP in Toronto.
Dirk.Lohmann07@rotman.utoronto.ca
Simardeep Gill
1994
Class Champion Chris Hind
2001
Class Champion: Elaine Ilavsky
Simardeep.Gill07@rotman.utoronto.ca Verick Schick is a production manager with Global Gillette at the Berlin Manufacturing Plant. He started his professional career in Stuttgart as an R&D engineer with the Fraunhofer Gemeinschaft. After two years, he transferred to Berlin and started working at the Gillette Blade & Razors plant. After an assignment in Brazil, he proposed to his wife Barbara and lives happily in Berlin!
Chris.Hind94@rotman.utoronto.ca
1996
Co-Class Champions Vanessa Blumer
Elaine.Ilavsky01@rotman.utoronto.ca Adedayo Mseka is an analyst with KPMG in McLean, VA.
2002
Class Champion: Ali Spinner (Charyk)
Vanessa.Blumer96@rotman.utoronto.ca
Blake Langill
Blake.Langill96@rotman.utoronto.ca
Janet Scarpelli
Ali.Charyk02@rotman.utoronto.ca Reunion Alert!

This class is celebrating a banner anniversary on May 31, 2007: for more information and to RSVP, please visit www.rotman.utoronto.ca/alumni/reunion.htm, or contact your Class Champion or the Alumni Ofce.
Janet.Scarpelli96@rotman.utoronto.ca Danny Chung is director of nance with Allegis Group Canada Corporation in Mississauga.
MBA (ACCOUNTING) / MASTER OF MANAGEMENT & PROFESSIONAL ACCOUNTING

Reunion Alert!
All MBA and MMPA classes in honoured years i.e. those that end in either a 2 or a 7 are invited to return to the Rotman School on May 31, 2007, to celebrate Reunion 2007. For details, contact your Class Champion(s) or Michelle Zathureczky, Manager, Volunteers and Reunion Coordinator at (416) 946-3665. You can also visit www.rotman.utoronto.ca/alumni/reunion.htm
1997
Reunion Alert!
This class is celebrating a banner anniversary on May 31, 2007: for more information and to RSVP, please visit www.rotman.utoronto.ca/alumni/reunion.htm, or contact your Class Champion or the Alumni Ofce. Eric Wong is vice president of RT Sourcing Asia
2003
Karl Michael is manager of Koster, Spinks and Koster, LLP in Toronto. Bohui Yu is an investment analyst at Income Partners Asset Management in Hong Kong. Brian Zhang is an insurance business analyst with Canada Mortgage and Housing Corporation in Ottawa.
Limited in Hong Kong.
1998
Class Champion Melody Tien Grewal
2004
Zhimei Chen is a senior associate at PricewaterhouseCoopers in Toronto. Mayer Xu is a senior financial analyst in the Hangzhou ofce of UTStarcom, a global leader in
Melody.Grewal98@rotman.utoronto.ca Dennis Kwong is director, business development
Phd / Class Notes
the manufacturing, integration and support of IPbased, end-to-end networking and telecommunications solutions, work that she nds both interesting and challenging. Hangzhou is heaven on earth: its a beautiful city. Mayer welcomes her classmates to the city and wishes them all the best! Jason Zhang is an associate in Actis Capital LLP, a leading private equity rm in the UK, managing about US$3 billion in funds. See www.act.is for more details. In October 2006, he married Tina and started their happy life together.
2003
Dr. Themis Pantos is an associate professor of
Finance in the College of Business at San Jose State University, California. Dr. Pantos has published numerous articles in various peer-reviewed Finance and Economics journals and his research and teaching interests are in the areas of corporate and international Finance. He is a Lucas Fellowship holder and has
won several academic California State University Research Awards, in addition to winning the Outstanding Undergraduate Professor Teaching Award in 2004, the Outstanding Faculty Award from the Disability Resource Center in 2004 and 2003 respectively at San Jose State University and The MBA Faculty Choice Award in 2000 at Rutgers University. Dr. Pantos was nominated for the Teaching/Scholar San Jose State University Award in 2006 and his biography is included in the Whos Who Among Americas Teachers.
2006
Robert Gauvreau is a senior accountant with BDO Dunwoody in Peterborough. Samuel (Wei) Shen is an accountant with Moore Stephens Cooper Molyneux in Toronto.
A ROTMAN INTRODUCTION:
PhD
1982
Dr. Jacob Warshavsky is a consult-
ANN HATCH
cial aid; and it has enabled the School to hire exceptional young academics from top-tier institutions. In 2007 alone, the Rotman School will hire 12 new professors, drawn from such leading institutions as Stanford, MIT and Harvard. We are all thrilled about the March 23rd announcement of a $50 million commitment from the Provincial Government to construct a new building that will host the newly-established Centre for Jurisdictional Advantage and Prosperity at Rotman. Our new goal is to raise an additional $60 million from private donations, and we are hopeful that the support from the Province will act as a springboard for our new fundraising efforts. We have already had extremely positive response to the Centre, and have already raised two thirds of our goal to date. But this is the just the beginning of the ambitious fundraising plans that will be rolled out over the coming months. This is where you the friends of Rotman come into the picture. I have already met many of our volunteers and donors, and I have been amazed by the time and energy they commit to the School. For them, and for all of us associated with it, the Rotman School has become much more than a place to obtain an MBA: it has become a galvanizing force in the business community by bringing together the worlds most talented thought leaders on a range of key issues, from corporate social responsibility to innovation, health care, entrepreneurialism, social services and the arts. One thing that has become crystal clear to me in my short time at Rotman is that this is an amazing place to be connected with. I look forward to meeting more of you over the coming months and to encouraging you to join us on our journey of innovation and excellence.
Ann Hatch
ant to hi-tech companies and a senior lecturer in the elds of IT and B2B management and marketing. He was the founding manager of the Information Division and the Research and Information Center of the Knesset (Israel Parliament). In addition to his PhD he holds an MBA and BA in Economics and Political Science from the University of Tel-Aviv. His extensive experience in Information Technology includes 20 years in the IDF Electronics and Signal Corps, from which he retired as a Colonel. He teaches Marketing Management, Information Systems, and Industrial Management at the College of Management, Israel, the Academic College of Natanya and the Hebrew University of Jerusalem.
Ann Hatch was named the Rotman Schools
1988
Dr. George Pink is an associate professor at the
University of North Carolina at Chapel Hill.
executive director of development in November 2006. Previously, she spent four years as a member of the fundraising team for the Canadian Opera Companys capital campaign to build Torontos renowned new Four Seasons Centre for the Performing Arts.
BE A CLASS ACT
VOLUNTEER AS A CLASS CHAMPTION
Class Champions ensure their class remains active and vibrant long after graduation and bring the Rotman School and its graduates closer together. They help organize reunions, promote events, and keep track of their classmates activities for inclusion in the Class Notes section of Rotman magazine. To represent your class, contact the Alumni Office at (416) 978-0240, or e-mail alumni@rotman.utoronto.ca.
Greetings everyone! I rst crossed paths with Rotman students when I managed a summer volunteer MBA internship program for the United Way from 1998 to 2002, when I recruited 15 energetic students each summer to work as fundraisers and consultants to United Way agencies. This experience taught me rst-hand the value of a world-class MBA: although these students volunteered only two hours a week, their impact was immeasurable in the increased fundraising revenues and policy recommendations they engendered. As you may know, the Rotman School successfully completed a $100-million-dollar campaign in September of 2006, and the results speak for themselves. This support has enabled our faculty to continue with their pioneering research by establishing a total of 21 Chairs and eight professorships; it has provided our students with life-transforming nan-
Executive Director of Development
Upcoming Events
Complete details are available at www.rotman.utoronto.ca/events
May 2007
May 1, 7:30-8:30am Rotman Alumni Career Management Speaker Series Speaker: Jamie Broughton, Founder, www.FootprintLeadership.com Topic: Use Your Natural Leadership to Build a Career You Love May 2, 6:00-7:20pm Rotman Master of Finance Speaker Series Speaker: Alan White, Mitchelson/SIT Investment Associates Foundation Chair in Investment Strategy, Rotman School Topic: Credit Derivatives: The New Frontiers May 3 and 4 Psychologically Healthy Workplace Conference @ Rotman Keynote Speaker: Julian Barling, Professor and Associate Dean, School of Business, Queens University May 31, 6:00-10:00pm Annual Rotman Reunion This is a milestone year for the Classes of 1952, 1957, 1962, 1967, 1972, 1977, 1982, 1987, 1992, 1997 and 2002.
June 11, 5:00-6:20pm Rotman Board Effectiveness Speaker Series Speaker: Gretchen Morgenson, Pulitzer Prize-winning Financial Reporter and Columnist, The New York Times Topic: Restoring Integrity to Executive Compensationand to Capital-Market Relations June 27, 1:00-5:00pm U of T Capital Markets Institute Enforcement Conference June 28, 8:00-9:30am Rotman Design Thinking Speaker Series Speaker: Bill Moggridge, Founder, IDEO; Consulting Associate Professor, Joint Program in Design, Stanford University Topic: Designing Interactions
July 2007
July 6 and 7 Bank of Canada Rotman Workshop Topic: Advances in Portfolio Management
September 2007 June 2007

June 1, 8:00am-4:00pm Integrative Thinking: Learning How to Think to Win 9th annual Rotman Life-Long Learning Conference Speakers: Thomas Stewart, Harvard Business Review; Howard Gardner and Ellen Langer, Harvard University; Mihnea Moldoveanu and Roger Martin, Rotman June 7, 4:30-6:00pm Reception in Honour of Rotman MBA Class of 07 September 12 The Business of Green: A Rotman Conference for Business Leaders
October 2007
October 9, 4:30-6:20pm annual World Mental Health Day Forum @ Rotman Topic: A Managers Guide to Substance Abuse and its Impact on the Workplace October 11, 5:30-7:00pm annual Rotman MBA Student Awards Ceremony October 16, 5:00-6:20pm Rotman Design Thinking Speaker Series Speaker: Katie Taylor, President and Chief Operating Ofcer, Four Seasons Hotels Inc.
INTEGRATIVE THINKING : LEARNING HOW TO THINK TO WIN

A Rotman School Conference for Thought Leaders
JUNE 1, 2007 - FOUR SEASONS HOTEL, TORONTO SESSIONS:
The Wealth of Knowledge: Intellectual Capital and the 21st Century Organization
THOMAS STEWART, Editor-in-Chief and Managing Director, Harvard Business Review
Five Minds for the Future: the Cognitive Abilities that will Command a Premium in the Years Ahead
HOWARD GARDNER, Hobbs Professor of Cognition and Education, Harvard Graduate School of Education
Designing the Thinker of the Future

MIHNEA MOLDOVEANU, Associate Professor of Strategic Management and Director, Desautels Centre for Integrative Thinking, Rotman School
Reinventing Yourself through Mindful Learning and Creativity

ELLEN LANGER, Professor of Psychology, Harvard University
Think Again: How Today's Greatest Business Leaders Think to Win

ROGER MARTIN, Dean and Premier's Research Chair in Productivity and Competitiveness and Director, AIC Institute for Corporate Citizenship, Rotman School
COMPLETE DETAILS: www.rotman.utoronto.ca/thinktowin
$743 for Rotman Executive Program graduates and UofT alumni
COST: $943; $188 for Rotman alumni;
Integrative Thinking: Learning How to Think to Win

9th Annual Rotman Life-Long Learning Conference
Participate in our 9th Annual Rotman Life-Long Learning Conference on June 1. This years theme is Integrative Thinking: Learning How to Think to Win . The days co-chairs are Tom Stewart, Editor-in-Chief, Harvard Business Review and Roger Martin, Dean, Rotman School.
We are pleased to offer the following presentations:
The Wealth of Knowledge: Intellectual Capital and the 21st Century Organization Thomas Stewart, Editor-in-Chief and Managing Director, Harvard Business Review Five Minds for the Future: the Cognitive Abilities that will Command a Premium in the Years Ahead Howard Gardner, Hobbs Professor of Cognition and Education, Harvard Graduate School of Education Designing the Thinker of the Future Mihnea Moldoveanu, Associate Professor of Strategic Management and Director, Desautels Centre for Integrative Thinking, Rotman School Reinventing Yourself through Mindful Learning and Creativity Ellen Langer, Professor of Psychology, Harvard University
Friday, June 1, 2007 Four Seasons Hotel Toronto
Think Again: How Todays Greatest Business Leaders Think to Win Roger Martin, Dean and Premiers Research Chair in Productivity and Competitiveness and Director, AIC Institute for Corporate Citizenship, Rotman School
Conrm your attendance today by registering at www.rotman.utoronto.ca/thinktowin We look forward to seeing you on June 1st!
105 St. George Street Toronto, Ontario, Canada M5S 3E6
Publication Mailing Agreement Number: 40062461

Spring 07

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Roger Martin: Underestimating the Risk of the Status Quo

Thought Leader Interview: Daniel Kahneman

Dolly Chugh and Max Bazerman: Bounded Awareness

The Magazine of the Rotman School of Management / Spring 2007

The Risk Issue

Sony recommends Windows Vista Business original.

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The Myth of Canadas Hollowing-Out by James Milway

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Rotman Magazine Spring 2007 / 19

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Following are three common types of bounded awareness.

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Join us at the 2007 ICD

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Hon. Paule Gauthier, P.C., O.C., O.Q., Q.C.

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Victor Young, O.C.

Better Directors. Better Boards. Better Business.

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Manage with this in mind dont over-invest Pre-plan an appropriate reaction

Research strategy options

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Develop metrics and monitor

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Photos left to right: John Hryniuk, Waleed Qirbi (MBA 01)

CMA Regular Program?

CMA Accelerated Program?

Which path to becoming a CMA is right for you?

CMA Executive Program?

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