2013 Palisade Risk Conference Series - Three stops coming up in November: Paris, Milan and Las Vegas

We have three cities left to go in our 2013 Risk Conference Series - Paris, Milan and Las Vegas! We have spanned the globe and stopped in 11 cities in the past 7 months. Last week at our Moscow Risk Conference we were able to present our latest versions of @RISK and the DecisionTools Suite programs which have been completely translated into Russian. According to Craig Ferri, Palisade's EMEA & India Director, "The speakers were of very high standard, and attendees were excited about the software and looking forward to being able to download the presentations. It was a great success and we look forward to new partnerships in Russia."

2013 Palisade Risk ConferenceThe Moscow conference, as well as the others in the 2013 Palisade Risk Conference Series, are beneficial for both novice and experienced users of our risk and decision analysis products. If you are a new user and unfamiliar with @RISK and the DecisionTools Suite, we invite you to see why 93% of the Global Fortune 100 are using Palisade products to make better decisions. If you are an existing user, this is your opportunity to network and be exposed to some useful hints and tips to get more out of our software.

In general, Palisade software enables clients to be more confident in the decisions that they make, in a wide variety of industries and applications. Clients use Palisade software in industries ranging from oil & gas, mining, and finance, through to utilities, insurance, and banking, along with government, manufacturing, and logistics. So, if one of your responsibilities is to create or base decisions on a credit risk analysis, financial risk analysis, or maybe a pharmaceutical risk assessment, or if you are looking to improve your project risk management strategies, we invite you to join us in one of the following cities to learn how other people utilize our software.

Palisade Conférence régionale sur le risque
Paris - 12 novembre
Voir le programme - Inscription

Palisade Regional Risk Conference Milan
Milan - November 14th
View Schedule - Register Now

Palisade Regional Risk Conference Las Vegas
Las Vegas - November 20th-21st *
View Schedule - Register Now

* 2-day event with 4 tracks for each day.


Previous 2013 Palisade Risk Conferences

An advantage of our software being available in 8 different languages is the Palisade's ability to provide risk analysis services throughout the world. The following is a list of the cities Palisade Risk Conferences were held this year. If you missed us in a city near you, be sure to look for us in 2014!


See also: Palisade Global Risk Conferences Advance Best Practices in Risk Management


Free Webcast this Thursday: “Refining the Business Case for Sustainable Energy Projects Using @RISK and PrecisionTree: A Biofuel Plant Case Study”

Join us this Thursday, Janurary 12, 2012, for a free live webcast entitled, "Refining the Business Case for Sustainable Energy Projects Using @RISK and PrecisionTree: A Biofuel Plant Case Study" to be presented by Scott Mongeau.

The sustainable energy industry sits at the nexus of growth and change: the popular groundswell for ‘green initiatives’, ongoing debates concerning global warming / climate change, fickle government incentives, the quest for renewable and alternative sources, expansion in developing economies, and the rapid emergence of new technologies. Sustainable energy industry sectors such as biofuel, solar, wind power each have unique selling points as well as practical challenges.  Across the board, profit margins are uncertain and tight, demanding detailed analysis and complex business cases.  Palisade's DecisionTools Suite is an ideal vehicle for conducting the deep risk analysis needed to separate the hype and ‘wishful vibes’ from the real risks and tangible profit cases needed to ‘green light’ sustainability projects.

Sustainable energy’s central competitor and sometimes partner, the petroleum majors, have distinct advantages, having established, streamlined supply chains and being embedded into the global economy.  However, traditional petroleum exploration is going to increasingly extreme and risky lengths to locate and exploit new reserves (i.e. Athabasca Oil Sands, deep sea drilling, project development in politically unstable regions).  The petroleum majors are dedicated users of the Palisade DecisionTools Suite to make their increasingly complex and risky business cases.

This free live webcast asserts that an energy development ‘risk / reward parity’ level is growing between new petroleum exploration and production and sustainable energy initiatives.  The presentation uses a biofuel plant case study as an example of how a profitable business case can be made for a sustainable energy project using techniques commonly applied in petroleum exploration and engineering initiatives.  The biofuel industry is expected to multiply its production by a factor of 50 by 2020.  The uncertainties of government subsidy, tax credits, and loan guarantees are crucial to meeting biofuel profit margins. Stochastic statistical analysis greatly improves the ability to pinpoint risk and to identify mitigation strategies. The case study uses @RISK to model biofuel project NPV, Evolver to suggest plant optimization strategies, and PrecisionTree to guide strategic decision making. The approaches presented have promise as a due-diligence tool for prospective sustainability entrepreneurs, investors, project managers, and firms. 

Scott Mongeau is Lead Consultant and Founder of Biomatica BV (biomatica.com), a niche consultancy specializing in biotechnology industry risk management. Scott has over a decade of experience in biotech, including key positions at Genentech Inc. related to risk management. He currently consults for several biofuel start-up initiatives and completed his thesis on biofuel project risk management. In addition to consulting, Scott is a part-time PhD researcher in the Executive Doctorate Program at Nyenrode Business University in the Netherlands. He holds a Global Executive MBA (OneMBA) and Masters in Financial Management (MFM) from the Erasmus Rotterdam School of Management (RSM). Additionally, he holds a Certificate in Finance from University of California at Berkeley, a Masters in Communication from the University of Texas at Austin, and a Graduate Degree in Applied Information Systems Management from the Royal Melbourne Institute of Technology as a Rotary Ambassadorial Scholar. Having lived and worked in a number of countries, Scott is an American citizen and currently consults and conducts research from his office in Leiden, Netherlands.

» Register now (FREE)
» View archived webcasts


Using the DecisionTools Suite for a Biofuel Plant Analysis

Presented by Scott Mongeau of Biomatica at the
Palisade Risk Conference in Amsterdam, March 29, 2011

Biofuel Plant AnalysisAn energy development ‘risk / reward parity’ level is growing between new petroleum exploration and sustainable energy initiatives. This case uses a biofuel plant case study as an example of how a profitable business case can be made for a sustainable energy project using techniques commonly applied in petroleum exploration and engineering initiatives. The toolkit includes risk analysis using Monte Carlo simulation, sensitivity analysis, optimization, correlation, econometrics, decision trees, and real options.

The biofuel industry is expected to multiply its production by a factor of 50 by 2020. The uncertainties of government subsidy, tax credits, and loan guarantees are crucial to meeting biofuel profit margins. Stochastic analysis greatly improves the ability to pinpoint risk and to identify mitigation strategies. The case study uses @RISK to model biofuel project NPV, Evolver to suggest plant optimisation strategies, and PrecisionTree to guide strategic decision making. All of these software tools are part of the DecisionTools Suite.

The approaches presented have promise as a due-diligence tool for prospective sustainability entrepreneurs, investors, project managers, and firms.

» Read the full presentation


Two Shapes of Bond Risk

Baby Boomers are coming face to face with the realities of retirement, and their financial advisers are having to dig deep to come up with strategies that will calm their fears of a recurrence of the financial meltdown of 2008.  In this climate, one term that comes up repeatedly is fixed income, which usually means bonds.  Here, it is interesting to note that even fixed is not as certain as it sounds.  Prices and rates of return for bonds vary over time and in opposition to those of equities.  Even given this dynamic, the challenge for bond fund managers is essentially the same as for equity fund managers--how to diversify a portfolio's holdings to minimize risk and optimize return.  

In 2008 and early 2009 the the credit risk of corporate bonds was painfully in evidence, and since then financial planners have been sharpening their credit risk management tools to stabilize returns on bond portfolios.  It has been generally accepted by investment professionals that the greater the number of financial instruments in a portfolio, the broader the spread of credit risk.  A recent credit risk analysis by the BondDesk Group found, however, that spreading risk over an increasing number of investments is effective only up to a point, after which further investments offer no further protection against loss.
The BondDesk Group used Monte Carlo simulation software to determine two values, tail risk (loss of 20%) and black swan risk (loss at a catastrophic level of 50% or more), in portfolios that progressively increased in size from 2 to 50 bonds. Taken together the two measures of risk predicted which bonds would default.  Interestingly, the simulations revealed that both kinds of risk were reduced by increases in portfolio sizes up to 10 bonds, and in both cases, these benefits began to diminish with bond number 11.  
The group's credit risk analysis brings good news for both investment advisors--it simplifies their work--and investors--it reduces the cost of investing!  For the juicy details, go to the BondDesk website.

Wall Street Journal Confuses Monte Carlo Simulation with Models

The recent Wall Street Journal article “Odds-On Imperfection: Monte Carlo Simulation” asserts that Monte Carlo simulation did not predict the market crash, and cites a chorus of critics calling for a fix to the technique. The article equates the technique of Monte Carlo simulation with the models that are using it – two very different things. For instance, the article states, “These models were supposed to help quantify and manage the risks of mortgage-backed securities, credit-default swaps and other complex instruments. But given the events of the past couple of years, it appears that the models often gave big institutions, as well as small investors, a false sense of security.”

This is true – the models for decision making under uncertainty gave a false sense of security. But that’s because the assumptions underlying the risk analysis models were flawed, not because the technique of Monte Carlo simulation was problematic. Monte Carlo simulation is simply a mathematical technique that recalculates many different possible scenarios – but only within boundaries set by the user.  You can’t change the underlying math behind these “what-if” calculations.

The article comes close to making this distinction in one sentence: “Critics emphasize that the problem isn't Monte Carlo itself, but the assumptions that go into it.”  It then goes on to describe efforts by firms to include “fatter tail” distributions that more accurately reflect the probability of extreme events occurring as an effort to improve Monte Carlo simulation.  Tools like @RISK (risk analysis software add-in for Microsoft Excel) allow complete control over the definition of many dozens of distribution types, enabling users to create as fat a tail as they want. While these efforts make sense, it should be made clear that these are changes to underlying model assumptions, not changes to Monte Carlo simulation itself. To equate Monte Carlo simulation as a technique with the probability distributions people decide to use is to equate a carpenter’s choice of nails with his hammer.

Finally, the article cites the need to run tens or hundreds of thousands of scenarios, instead of just 100 or 1000.  This too is user-defined, and tools like @RISK can run as many scenarios as desired.

Randy Heffernan
Vice President

Dissecting the Credit Crunch

In assigning blame for what they are now calling "the credit crunch," the news media have been pointing vaguely in the direction of risk assessment and the models produced by Monte Carlo simulation.  But with the exception of Joe Nocera's excellent piece focusing on value-at-risk in the New York Times, I had not seen a clear explanation of the factors feeding into the exponential decline of the credit markets until I came across a policy paper from the Association of Chartered Certified Accountants, "Climbing out of the Credit Crunch."

This paper provides an excellent, plain-English account of the interplay of the many factors that brought the current turmoil in the financial sector--a number of these factors the ACCA identifies are psychological and attitudinal.  Its discussion of risk identification and management focuses not on risk analysis models but on the underlying assumptions--a common "garbage in, garbage out" observation--and a passive, unquestioning reliance on these models.  This leads the ACCA to one of what it identifies as a major risk management failure: "a very clear disconnect between incentives to senior staff" and [highly sophisticated] risk management functions."

The point is that risk management is so crucial to financial performance that executives who keep a close, critical eye on the tools and techniques they are using to assess risk should be rewarded for that vigilance. 

Lack of Risk Management Cited as Key Cause of Credit Crunch

In a recent policy paper, the Association of Chartered Certified Accountants (ACCA) named the “failure of institutions to appreciate and manage the inter-connection between the risks inherent in their business activities” as a key factor that led to the credit crisis. The paper goes on to list the lack of influence of risk management departments and weakness in risk reporting as additional primary factors. According to the ACCA, “[Senior managers] did not understand the risks and were using risk assessment with tools which were inappropriate.”

As the global recession deepens, the ACCA paper underscores the growing emphasis on risk analysis in financial institutions and all businesses. @RISK and DecisionTools Suite software is specifically designed for risk analysis using Monte Carlo simulation and other techniques which can show virtually all possible outcomes, however unlikely. In today’s current economic climate, objective quantitative analysis of all risks cannot be overlooked.

» Read the policy paper "Climbing out of the Credit Crunch"
» Learn more about the DecisionTools Suite
» Learn more about risk analysis


Is Norway’s Pension Fund Adequately Diversified?

Retirement planning in NorwayAs a regular visitor to Norway, it is hard not to be impressed by the wealth generation in the country. Even more impressive is the discipline of the government and population to accept that the majority of the vast oil windfall of the country should be invested for the future (in a pension fund) and not spent today (high tax rates and price levels being one testament to that).

In this blog I allow myself some raw speculation as to whether holistic risk management thinking is being adequately applied when it comes to the government’s management of the wealth generated by this windfall.

In the spring of 1997, the Ministry of Finance decided that the Government Pension Fund–Global (previously known as the Government Petroleum Fund) should invest parts of its portfolio in equities. In January 1998 the fund consisted of bond investments worth NOK 113 billion (about USD 15 billion at current exchange rates). Since then inflows of new capital into the fund (also boosted by the high oil price) have been significant; in 2007, capital inflows averaged more than USD 300 million per trading day. By January 2008 the fund was worth over NOK 2000 billion (about USD 300 billion) and it is forecast to be worth over NOK 4000 billion (about USD 600 billion) by 2015 (according to the National Budget 2009)—the ultimate in retirement planning. Over time the fund’s investment guidelines have been relaxed, with the fund currently consisting of about 50% equities and 50% bonds, including government, corporate, securitized and inflation linked bonds.

To some extent there is a natural diversification in the fund. For example, to the extent that it is believed that global equities in aggregate are negatively affected by high oil prices, then there is a natural hedge in the portfolio, as increases in the oil price will reduce the equity value but lead to increased capital inflows (although the balance of this will change as the equity portfolio becomes larger). Similarly, oil-related new inflows and the investment in inflation-linked bonds could also provide some protection against long-term inflation (arguably, equities may or may not be a good long term inflation hedge). In addition, the fund of course also uses advanced tools of portfolio management, which are surely applied with rigor. However, as we know from the credit crisis, such tools can lead one to a false sense of confidence if they miss the big picture (deckchairs on the Titanic, etc!).

In this context, I allow myself to speculate (hypothesise?!) as to whether the fund should be devoting far more significant efforts to invest in non-traditional assets. (The fund’s performance is essentially currently measured against a benchmark portfolio of bonds and equities and so such efforts or investments would be hard to justify against these objectives).

The most obvious scenario in which the fund could lose out significantly would be a shift in the world’s energy sources (over the many decades of pension obligations), which could create an environment that is simultaneously largely unfavorable for most asset classes in the fund. Conceivably the potentially massive costs associated with creating a low-carbon global economy could produce a situation that is unfavorable for most global equity investments, that could unleash inflationary forces that reduce the value of many bond investments, and potentially reduce demand for oil (and its price). Such a “nightmare” scenario for the fund does not seem beyond the realms of reality. 

The most obvious strategy to mitigate the effects of this scenario would be for the fund to proactively take very large positions in alternative energy technologies. Such positions would presumably need to be very large (and possibly require the fund to itself create and support the development of new innovative companies in this area, not just to passively invest in existing ones). The costs and risks in doing so would be large (particularly as the scenario may never materialize), but it could be a prudent one, given the already very large fund that already exists for a small population base of about 5m people. Could it be so bad if 5%-10% of that fund were invested in such technologies? (Such investments would arguably support, or at least relate to, some of the fund’s other goals—such as ethical or social investments). A risk assessment would be a good idea. Now, back to the real world!

Dr. Michael Rees
Director of Training and Consulting