The Premortem
A premortem is a tool we use in the later stages of developing a risk management plan. A premortem is useful because it forces us to revisit our strategy, and think about what might be missing. By using the concept of a premortem, we are attempting to force hindsight from the future into the present. Imagine we are trying to write the newspaper story about how it all went wrong before it all goes wrong.
In the article “Coining Some Terms,” we use a series of coin flips to illustrate terms we use regularly - risk, reward, edge, risk management, and a few others. In the last example presented in that article, the hero, Ed, is in a situation where he has made a small bet on the flip of a coin with two friends, Jerry and Mark. In that example, Ed has done some quick math and essentially locked-in a profit of $1.95 no matter which way the coin falls. Ed has done his homework, found some edge (the bet with Jerry), and managed to hedge that edge (the bet with Mark). Things seem great for Ed.
If Ed approached us with this case and asked what his primary risk was, we would look at the face of things and see that everything appeared in order. Then we might run through a premortem exercise to try to understand what risks remain. The glaring hole in this example is what is known as counterparty-risk. What if Jerry or Mark could not or would not pay? If that happened, suddenly, the whole thing would go south for Ed. If Jerry and Mark are reasonable credit risks, or payment is guaranteed, then there is virtually no risk for Ed.
In this case, the premortem helped us to get past the surface math and get outside the box a little, to identify what might be a considerable risk. Finding sound, and sometimes novel, ways to identify, evaluate, and mitigate risk is the purpose of developing a risk management plan. At Quartzite Risk Management LLC, that’s what we do day-in and day-out. We have a deep understanding of risk management, and we love working with clients to create robust risk management strategies that work for them.
