Managing risk in the age of the financial crisis is akin to playing a poker game — success is tied to active risk/ reward assessments and an honest sense of capability. Most great poker players, like most firms great at risk management, are not born but rather evolve. The psychological breakthrough for great poker players occurs when they admit, often after enduring a big loss, that they never truly understood the odds of the game they were playing. Poker players do not manage successfully to the odds early in their careers for several reasons, including underestimating the power of knowing the odds, having the fortune to win without a deep understanding, and simply not working hard enough to factor all available information to position themselves to understand the odds.
Like a poker player’s big loss, the financial crisis was a wake-up call for many chief risk officers (CROs), reinforcement of a vision for a few, and a lesson learned for all. CROs now realize that weak hands, falsely portrayed as better than they are, ultimately are called. And when a bluff is called in financial services, it's not just the regulators that the institutions need to worry about — it is the marketplace, which may be even more important. In the financial crisis, shareholders paid a huge price and the taxpayers picked up the tab for the cost vis-a-vis bailouts for the weak hands.
Within their organizations, at conferences and through various disclosures in the media, successful CROs read the players at the table to determine who was sincere. They understood the odds when their firms took strategic chances like acquisitions and initiating new products such that they could support or oppose those initiatives. They knew to rely on timeless principles and not to follow strictly rules that others made and methodologies that others built. And while CROs can no more account for the exact level of all risks than a gambler can count cards in a double deck, they kept score of losses and established "what if” sessions with experts as a way to understand better how much the greatest risks might impact their institutions.