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J-Term class assesses risk management

January 24, 2012

Prof. Jim Peterson, a retired lawyer, helps Carthage students understand how to manage the risks they or their future companies can control.

Professor explores ground between bell curves, 'black swans'

In a world that has proven to be predictably unpredictable, Prof. Jim Peterson wants Carthage students to understand how to plan for the risks and, when possible, mitigate them.

The adjunct professor is teaching here for the first time, with a January Term class titled Risk Management: Bell Curves and Black Swans. He taught similar classes to advanced business and law students in Chicago and Paris.

The class examines "writings on decision-making under uncertain conditions," Prof. Peterson said. Bell curves are predictable occurrences that follow expected patterns, while truly unexpected events with major consequences are labeled "black swans" — a term popularized in a book by trader Nassim Taleb.

Much of Prof. Peterson's legal career was spent in risk management, and he retired from Arthur Andersen before the company became embroiled in scandal. He has continued to keep a watchful eye on the financial picture through reporting and blog posts. He worries that the watchdogs are "doing a lousy job of it."

Prof. Peterson said trends often follow the bell curves. Life insurance companies are built on those patterns.

"Since human beings don't live to be 300 years old, you can do premium calculations and run an industry that makes money," Prof. Peterson said.

Unfortunately people rely too much on the continuation of a trend, he said, and that has led to major problems.

The class is composed largely of students majoring in business or economics, and the implications for business are clear in the wake of a credit crisis and implosions of major companies. But Prof. Peterson makes clear that the lessons are helpful for life in general.

People don't know when a car accident will come, for example, but they can minimize the risk of serious injury by wearing a seat belt and maintaining their brakes. They can also protect themselves from disease and brace for a job transfer.

"We fool ourselves into thinking we know all we need to know to guide our behavior," he said.

Although some major events such as the Sept. 11 attacks qualify as "black swans" that were well off the radar, Prof. Peterson said the news provides us with others that could be prevented. He cited the recent sinking of a cruise ship that crashed when the captain reportedly steered too close to shore.

Executives fall into traps, as well, Prof. Peterson said. His J-Term class examines the types of "blinders" that prevent them from spotting danger ahead, ranging from budgetary concerns to the need to protect a reputation.

For the final project, each student is required to analyze a corporate failure or other highly disruptive event. They will write a critique of how well or poorly the risk was managed.

From the mistakes of history comes a chance for Carthage students to avoid repeating them.

—Mike Moore, Carthage College