Rogues of Wall Street: How to manage risk in the Cognitive Era, by Andrew Waxman
Reviewed by Francesc Rodríguez Tous
From rogue traders to rogue algorithms, from rigging the Libor to Ponzi schemes, and from money laundering to hurricanes, operational risk has become a central fixture of the finance industry in recent years.
Andrew Waxman, an associate partner at IBM consulting, has written a very interesting book about the many different forms this type of risk can take.
Mr Waxman starts by explaining the internal and external threats faced by financial institutions nowadays. He certainly knows of lots of cases and examples, and it is the first time I've seen so many of them appearing together in the one place.
For a lecturer, this is useful: I now have a large set of case studies to choose from to discuss in class. Anyone interested in the recent spate of financial scandals will also enjoy this part. Do not expect, however, a deep analysis of any of these risks.
I have spotted some inaccuracies, such as when the book mentions that “spreadsheet errors may also have been indirectly responsible for extending the financial crisis in Europe”, in reference to the Reinhart and Rogoff Excel mistake in a 2010 research paper they published, the fact is that this (non-peer-reviewed) paper was cited in very few official communications as supporting evidence for government austerity measures.
The second part of the book discusses some ways for financial institutions, and firms in general, to manage and mitigate operational risks.
As with the first part, the author offers a first glance, a quick look at these risks. Do not expect a recipe to apply to your own firm, but do expect many ideas and the references to allow you to dig deeper.
Two topics stand out here. The first is cognitive technology, such as machine learning and artificial intelligence. The use of these technological advances, coupled with the availability of big data in financial institutions, can significantly improve internal controls in the firm.
The second topic looks at the role that psychology plays in these risks. Behavioural economic research has made tremendous progress in recent years, and the recent Economics Nobel Prize winner, Richard Thaler, is a fine example.
The book ends with seven traits the author considers key to managing cognitive risks; I would underscore the suggestion to keep an open mind about regulation and to engage in constant self-analysis.
All in all, the book is stimulating, identifying plenty of different risks for financial institutions and possible mitigating solutions, all of them backed with cases from recent times. In some instances the content is disorganised and the reader will find some inaccuracies, but the book provides plenty of insights into an industry that has already changed a lot and will continue to do so over the next few years.