Analysing Sumitomo
   
   Interrelationships and the big picture
   


















 

Analysing Sumitomo

Interrelationships and the big picture

Now we can move on to look at how the various problems interrelate. A full analysis would take days of course. However for a trading or market problem there is a pattern that is typical. There is always a lack of equilibrium between the mechanisms for expansion and those for balance. Every organization has these two forces and when one outstrips the other, there is a potential for explosion. Essentially, an organization can function at any level of risk if expansion forces and balancing forces are equal.

It is useful to write down those things that contribute to expansion or balance. In this case clearly the new products and suppliers overwhelmed the risk management systems in Sumitomo. They apparently did not follow the practice of checking for these balancing mechanisms as they added now forces for expansion.

Finding a focus

The fourth step in our process after identifying the obvious problems, the hidden problems and problem interrelationships is understanding constraints to solving the problems. These are specific to organizations but there is a list that is always present. It includes denial and hindsight bias.

Shock, denial, defensiveness and finger pointing

Lets begin with denial. The first reaction for many in a trading crisis is disbelief or a shock-like reaction. This may significantly slow down the cure and will for certain if there are conflicting stories or lies being told. Many people move from shock to denial that the problem is really happening or there is a tendency to minimize the problem. A good rule of thumb is to multiply the first loss reported by two. Most people search for rational ways to divide by two. Using this as a gage, the Sumitomo loss will ultimately approach $3.6 billion.

The next stage is defensiveness. Effort is directed toward covering one's territory to make sure the slings and arrows are directed elsewhere. This of course inhibits the discovery of both the facts and the various problems.

Lastly comes finger pointing. Fighting sets in at his point and the ability to get at the real problems is severely hampered. It is therefore necessary to act quickly to go through the process described above before people have a chance to put up these barriers.

Complexity

Complexity is also a barrier particularly in the Sumitomo case. Some people may have to be educated before they can even make a critical decision. Or they may make a mistake because they simply must decide before understanding the implication of their decisions. It is likely that if Sumitomo had understood the full implications of reassigning Hamanaka, they would not have done so. This lends credibility to their statements that they were fooled by him.

Hindsight bias - Separating fact and myth

Hindsight bias is the last ma'or barrier. As time passes, people actually begin to believe their version of the facts. Perhaps they have been coached by a lawyer or have created their own rationalizations. Once people, especially traders, begin to believe their own creative viewpoint, it is very hard to detect the truth. This is why some traders are hard to catch. They believe what they are saying.

It is critically important not to fall into this trap. Even if it becomes necessary to protect your organization by giving less than all the available information, do not begin to believe this is all there is to know. You will need everything you know to prevent the next problem.

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Case Studies * Analysing Sumitomo