When misunderstanding risk is truly disastrous – with Hector Ibarra
As our latest podcast guest demonstrates, the best of intentions can create very unwelcome situations if they are unaccompanied by a proper understanding of risk
From Plutarch to Pascal, we have referenced the works of a number of philosophers, here on The Value Perspective, but never anything by 19th Century German heavyweight Friedrich Nietzsche. Not that is, until now – and the reason for his appearance today is one of two regular questions we put to our various podcast guests: Is there any book you would like to recommend to our listeners?
Our most recent guest on The Value Perspective podcast is Hector Ibarra, who is chief executive officer of Global Parametrics. This company was founded to develop financial products that can help give non-governmental organisations (NGOs) the best chance of responding quickly and effectively to natural disasters in the world’s poorest countries.
Without getting too caught up in complex definitions, parametrics is a branch of mathematics where calculations are influenced by particular variables or ‘parameters’. Extended to the world of insurance or hedging, then, it involves developing contracts where payments to an NGO, such as the Red Cross, are triggered by predefined events – for example, an earthquake or a cyclone of a particular intensity.
“Our focus is on how to provide money in advance of a big event – for example, a tropical cyclone in the Philippines,” Ibarra explains. “The concept is, if people on the ground have access to cash, the survival rate is increased dramatically. If they don’t have cash, they cannot buy or stock food and they cannot buy transportation to be able to get out of the area, so the mortality rate is way higher.
“Providing cash in advance is very important from a resilience perspective but that means you have to build a system that allows you to monitor storms and offers a clear signal of reaching a certain threshold that serves as a triggering payment for the beneficiary.” Get that right, however, and those beneficiaries have the reassurance the solvency of their aid programmes will be protected wherever they are operating.
And Ibbara’s book choice? Nietzsche’s 1886 opus, Beyond Good and Evil. “It may be a bit dense,” he concedes. “But it is a good reminder that, no matter where you are from, as a human being you have natural biases and assumptions that are informed by your culture or religion; it is a good reminder about the need to build bridges with people who are different; and it is a good reminder we do not hold the only truth.”
Here on The Value Perspective, we have often written about the need for investors continually to challenge their instinctive biases – be they emotional or cognitive. Furthermore, as natural contrarians, we are all for building bridges with people who are different while, as investors who aim to remain on the right side of the averages, we know we do not have a monopoly on truth. We just didn’t know we were channelling Nietzsche.
The other regular request we make of our podcast guests is for an example of a decision they have made or seen made that has worked out badly – and, again, Ibarra’s answer has some echoes of an earlier article on The Value Perspective. “When I was working in the World Bank,” he says, “I realised things were done with the best intentions but the accompanying risks were not always well understood.
“There was, for example, a plan to create a lot of schools that would not only promote education but would act as places for people to congregate when there was a disaster – but not all were built to withstand earthquakes. So, in the absence of any consciousness of risk, all these good intentions to promote education in these countries created supposed areas of safety that were actually very risk-prone.
“I think that is changing but organisations do need to be conscious that sometimes good intentions without a good understanding of risk can create an unwelcome situation.” As we say, Ibarra’s story reminds us of a piece we wrote a few years back about a number of charities whose popularity and levels of support were disproportionate to their pragmatism and effectiveness.
In Cause and effect, we noted how one charity’s clever idea involving roundabouts that dig for water and then pump it to the surface as children play on them ultimately failed in practice, while another’s plan to distribute educational materials came to nothing in the absence of properly trained teachers. Yet both had received significantly greater financial backing than the far less glamorous aim of deworming children in Africa.
That, however, is also one of the most effective ways of reducing poverty in poor countries. As we concluded at the time, the twin morals of this story – that the best decisions can be reached by analysing data rather than when emotions are in play, and that the most effective solutions can be found in the least fashionable-sounding areas few people want to back – also have great resonance with us here on The Value Perspective.
Please note: Blue Orchard, the impact investment firm in which Schroders owns a majority stake, is a significant shareholder in Global Parametrics.
Juan Torres Rodriguez
Fund Manager, Equity Value
I joined Schroders in January 2017 as a member of the Global Value Investment team and manage Emerging Market Value. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet, I was a member of the Customs Solution Group at HOLT Credit Suisse.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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