Alexander Kotov (1913-1981) was a Soviet Chess Grandmaster and author. In his book, Think Like a Grandmaster, he described a situation now known commonly as the Kotov’s Syndrome. The situation is when a player thinks hard for a very long time but does not find any clear path, and then since he’s running out of time, quickly makes a poor move.
As an Organization that trades Energy or Commodities, several of us face Kotov’s Syndrome quite often, especially with Risk Management. Price, Liquidity and Credit Risks are a part of nearly every stage of the supply chain today. No matter how integrated the operations are, or aren’t, it is never easy. Too many variables to consider, too many branches in the decision tree. Decisions on Hedging, what-ifs, trading strategies, compliance and control, working capital, counterparty risk, receivables, logistics, the list just goes on. The number of people who understand the business in its entirety always grows at lesser pace than the business. A lot of data kept right in-front of us needs to be metamorphosed into actionable information too – something that’s been work in progress for quite some time. And time is running out.
Managing Risks on Energy and Commodity portfolios today is a lot like dealing with Kotov’s Syndrome. Need for faster and more informed decisions catches up with companies as soon as they start making faster and more informed decisions. This vicious cycle can only be overcome by taking a giant leap in the way Risk Management framework is adopted and implemented in the company.
It is less important to have the “best” Risk Management algorithm or framework and more important to have the framework “percolated” down the organization. In the recent past many large organizations have shut shop not because they didn’t have a world-class Risk framework, but because their diverse teams were not following it (operationally / conceptually).
“It is less important to have the “best” Risk Management algorithm or framework and more important to have the framework “percolated” down the organization.”
The need is to have more logistics managers who understand when to transfer risk from near month to far month (depending upon organization’s strategy), a marketing manager who understands the risk of a structured product before offering it to a counterparty, a trader who understands that more diversification across portfolios releases more risk capital for trading, and so on.
These tactics must be supported with a tool that automates tedious and error-prone processes for risk managers across the board. Tools that automate processes enable teams to look beyond the daily grind of obligatory reporting and analysis of old data. Training people to generate reports faster has a physical ceiling, but teaching them to select between various choices based on current circumstances is only limited by managerial aptitude.
This is a far better way of speeding up thought process across the chain and breaking out of Kotov’s Syndrome. You’ll still be presented with tough situations without clear paths, but surely it will be far less frequent.