ERM was not a focus at the top of the business cycle, when record profits were being recorded. Many CROs now report that they gave clear warnings of impending problems -- which were completely ignored! Now everyone talks as if ERM is very important and will be forever after.
Over the past several years some firms went through the motions of creating an ERM function to appease regulators. Others had a much more conservative risk culture and avoided both the profits and the madness of the boom. At some firms, "doubling down" after a loss was the preferred risk strategy; a great trader -- a hero -- was someone who had the fortitude to keep doubling down until the trade made a profit. A few firms were doing full-fledged ERM with intensive modeling, and yet were surprised when they confronted circumstances their models characterized as 1 in 10,000 year losses.
This presentation will suggest a new/old theory that explains all of those stories with ideas borrowed from Cultural Anthropology - The Theory of Plural Rationalities. This approach helps to explain firms' risk strategies during different phases of the business cycle and perhaps indicates some drivers of the cycle itself. It will also provide an explanation of how the statement "actuaries have always been doing ERM" can be true at the same time as the statement that "ERM is a very new idea that has not been used yet in most firms." Finally, using these ideas, we will suggest a new approach to risk management through the business cycle that some ERM purists may hate, but the pragmatists in the audience might just love.