Coping strategy
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A means of dealing with a risk, situation or unwanted outcome. These fall into a few categories:
- Risk management: Practical things you can do each day to minimise the probability of unwanted events which could be catastrophic, coming close to happening in the first place: Hire experts. Don’t do risky stuff. Avoid concave risks. Monitor your clients. Be watchful.
- Limits: Mines, defences and bear-traps you can set to scare off bad things if they do come to close: Margin, security, risk limits
- Enforcement: Airbags, roll-bars, inflatable life-rafts and avalanche kits that kick in once bad things have happened: Close-out rights, events of default, indemnities.
- Exoneration: means by which you, personally, avoid being blamed for things that did happen and were catastrophic. Disclaimers, disclosures, weasel wording.
The running cost of exercising coping strategies is inversely proportional to their usefulness. Hiring expert managers to monitor and avoid risk is a full-time, up-front cost. Limits and enforcement tend to be costly to implement. Exoneration costs nothing day-to-day until after the fact, at which point it is both useless and ineffective. If the loss threshold is high enough, you will get fired.
Accidents
From Charles Perrow’s The Next Catastrophe: accidents will happen. Four strategies for coping: three focus on the accident, one focuses on your organisation.
The Accident
- Minimise chance that accidents happen.
- Limit damage accidents can cause.
- Reduce vulnerability to accidents.
- Respond when accidents happen.
Vulnerability to accidents
Assuming accidents will happen, reduce vulnerability to them. Vulnerability comes in the form of unusual concentrations:
- Energy: in a financial services firm, call this financial risk, or profit-and-loss generators
- Population: different models of distributed network. Compare “hub and spoke” models like airports (fragile — take out a hub and large parts of the system are inoperable) with “multiple-node” networks like the internet (robust — take out a node and everything can flow a different way).
- Political power: increases the vulnerability to harm from executive failure.
| Avoidance | Damage Limitation | Reaction | Aftermath | |
|---|---|---|---|---|
| Strategies | Know your client; have good data
Manage relationship Monitor trades Due diligence |
Credit lines
Trading limits Red flags Security/collateral |
Close-out
Events of default Security |
Internal enquiry
Regulatory enquiry Litigation Disciplinary |
| Environment | Calm, orderly, timely, systematic, thorough, inquisitive, patient.
The object is not to be satisfied there is no risk but to to identify where is the risk. |
On alert.
Stressed, but solvent.
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Chaos: Panic, Urgency, Volatility, Fog of war
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Recriminatory
Coloured by hindsight Constructing a new narrative Designed to attribute blame (elsewhere) |
| Information quality | High; unpressured.
Good lines of communication, functioning well. |
Adequate. Communication will deteriorate as the situation gets worse. Counterparts may be economical with information | At this point, it is likely the information you had was already bad; it will now be worse | Limited: slow to emerge; vetted; filtered; coloured; constrained; restricted to “optimising facts” |
| Effectiveness | High | Medium | Low | Hostile |