crumpled_bill[1].rI live in a fairly straightforward world, I guess. I’m often accused of being naive but I’d argue I feel enlightened. Put bluntly, I think risk is always about money.

This has to do with my education from Douglas Hubbard. When I hear nebulous problems I know that I can use the methods of Enrico Fermi to decompose them by asking Fermi questions. Most people think this too simplistic for their complicated world, but I’ll side with the Nobel prize winner on this one thank-you-very-much.

I often have to answer for my position when I stoically say that reputation can be measured in dollars. “But Jack,” folks will say, “its so hard to measure that.” I disagree. Why does anyone care about reputation? Well, for businesses, its about the ability to retain and acquire business. For whatever scenario you are analyzing, make some calibrated estimates of how much business you are likely to loose (use ranges) and suddenly you’ve applied some really complicated quantitative methods in a very practical and straightforward manner.

So I was having a discussion about control automation and the reasons organizations spend money on just such a thing. Now, since my worldview on this is that risk = money, it was straightforward for me. Organizations automate controls in order to save money. The howling in protest was fierce. “Jack,” they said, “automation speeds things up so the answer must be efficiency.” “Why do we care about being efficient?” I countered. “Jack, automation also reduces errors, so effectiveness is the answer,” said another. “Why do we care about being effective?” I countered again. Indeed, in all aspects of risk, the answer can be boiled down to money. I want to be faster so I can have the same resources do more work, saving me the cost of buying more. I want to be more effective so that I don’t have more loss events, saving me the cost of responding to them. The other common argument I hear is to blame regulators or auditors, as in “we need to automate to satisfy the auditors.” Once again decomposition helps us analyze this approach–why do we need to satisfy them?

When presented with these sorts of questions I come clean and admit that money drives risk and priorities. We spend money on things we care about, and we spend money to avoid losing money elsewhere. There are countless examples of us using money as a measure of time as well, as in how much would you spend to avoid waiting in line at Disney World? Turns out, there is a service where you can pay to pay someone to wait in line for you, making your holiday that much more pleasurable (although I think its only open to celebrity visitors–and priced for them as well).

Its not cynical, its enlightened. Once you accept this basic premise, all your “hard” problems get that much more easier to model.