Complex Risk Management Software May Have Softened The Recession

Could the great recession of 2008 have been prevented by better risk management software? Would these programs have exposed the deepening dangers of complex derivatives, such as credit default swaps?

The answer is perhaps. Most likely they would have helped mitigate the fall.

“I think (the turn down) could have been different,” says Sam Savage, a consulting professor at Stanford University and the brainchild of new probability-management program. “The more transparent we make probability, the harder it is to blow smoke.”

Savage hopes venture capitalist and corporate executives will use his new program to better assess the risks inherent in new startups and other business ventures.

Already he has interested software powerhouses Oracle and SAS in the software’s concepts and is working with both companies on products.

Savage claims many business decisions are made with inadequate data – often with market averages used to calculate expected product demand and pricing. Instead, a broad range of variables would provide a better tool for examining uncertainty.

For example, an examination of U.S. housing prices over several decades would show a steady upward trend. But looking at them for the past year or two paints a different picture. Both pieces of data should be incorporated in a probability assessment of business risk.

“The flaw of (using) averages arises when people plug single numbers into spreadsheets,” says Savage, who discusses his work in a new book entitled The Flaw of Averages. “We found a way to store thousands of numbers in the single cell of a spreadsheet.”

This enables the program to examine business uncertainty by calculating a range of possible outcomes – and gives business leaders the chance to measure their decisions against a complex web of variables.

For example, Shell is already using the probability techniques to better assess the profitability of new oil drilling in light of a broad range of possibilities, such increased political unrest in Africa and a spike in oil prices.

Savage says he hopes to release a first version of his software in a couple months. The cost will be $200.

It would be interesting to see what it says about the probability of his success.