We have already focused on the US Marine Corps approach to risk management (see “Risk Management the US Marine Corps – it is a process”). Still, they are not alone within the military with formalizing approaches to decision-making under uncertainty. The US Army addresses the issue with a variation on the problem in its risk management manual. Again, there is a focus on process and discipline, which should be the focus of any risk management program. A common theme is having a solid risk process to respond to uncertainty.
The US Army focuses on four main principles. These principles include integration and decision-making at the right level, continuous assessments, and constant weighting of risk-return.
The principles of RM are:
- Integrate RM into all phases of missions and operations
- Make risk decisions at the appropriate level
- Accept no unnecessary risk
- Apply RM cyclically and continuously
US Army’s Approach to Risk Management
The US Army’s five-step process breaks risk management into two significant parts: assessment and management. You need to measure risks, take actions, and then evaluate in a continuous loop. Feedback and reassessment are critical to the process.
Risk Assessment Matrix
A risk assessment matrix does an excellent job of matching the frequency of risks with the event’s severity. This combination determines the level of risk. This is an approach that may be helpful for many money managers. A threat-harm trade-off determines the level of risk for a portfolio. Looking at risk from this framework is a different perspective, albeit not inconsistent, from the classic return-volatility framework.
Criteria for Effective Controls
Another interesting matrix from the Army is their criteria for effective controls. This table matches activity with risk controls, which help define organizational roles. These criteria can easily be mapped into the activities of a money management firm.
Comparison with Asset Management Risk Management
Asset management risk management seems to focus on mapping risk into a return-volatility or VaR framework and spends less time on the process. The Army has to focus less on countable events and more on uncertainty. Consequently, there may be more value in the process than statistics.