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Consider those from the quants (quantitative analysts). These are, or were, the geniuses populating Wall Street, concentrated at one time at JPMorgan. Among other sure-fire quantitative tools, they worked out risk models for just about any old valuable asset. There's little doubt this same gang dreamt up the CDSs [credit default swaps] that brought insurance giant AIG to its knees. 

The risk calculation tool, invariably called Value at Risk, assured players over the past few years that, with a better than 99-per-cent chance, only a tolerable quantity of the sophisticated financial instruments, including mortgage-backed securities and their derivatives, might be wiped out.

It turned out that the 1-per-cent outlier represented a calamitous loss of some tens of per cent of the world's gross domestic product. Perhaps it is our fault after all, for not asking how much this 1-per-cent loss could be worth.

Since most of us are not geniuses, we can only speculate that the rare miss by these brain trusts may be excused or explained away by a few inconvenient factors. 

The first was a little lame:  all the risk calculations had relied on statistics based on Gaussian normal distribution, a bell-shaped curve with long but low-level extreme tails.  Let us forgive and forget that recent events did not appear in any way "normal". I do not recall that Gauss ever commented that the market, or greed, might display normal behaviour.

If mathematics and statistics were to be used, perhaps a diffusion equation from a first-year physics class might have worked out better.  Singularity could be invoked here; a singularly disastrous outcome might be within the realm of its prediction.

Another major excuse from the quants was that the historical data and statistics for the risk calculations were accumulated only in the preceding few years - the bubble years for the United States. This is to say that very wrong data were used.

Tolerable risks were predicted after relying on simplistic models, furnished with historically aberrant statistics. Toxic securities and their derivatives were then hawked by super-salespeople and sold well throughout the world.  The outcome, now widely known, was an unmitigated disaster.

It would have taken another set of geniuses to figure out that the risks had been calculated wrongly, but who would have listened?

Step back to the small companies that we are part of, and ask: have we perhaps come up with strategies based on unreliable tools and sets of underlying assumptions and data that are not particularly applicable? Until recently, oil prices rose alarmingly. Now there is a steep decline in commodity prices. These are some of the data beyond our comprehension. Did we ride the waves expecting that they would never end? 

There is a bright side to all these concerns: we, as managers, can clean the slate and start anew. But before we announce a new path or a new direction, it is best not to waste time making excuses for what went wrong. Try to avoid finding someone or something to blame and punish.

It is time for managers to show leadership and compassion. Leadership will take the form of showing responsibility and accountability for hard decisions to be made. When the old models and business plans are no longer applicable, leaders will need the ability to persuade others that without change there will be no tomorrow. Equally important is sincere compassion, simply because many of the changes will bring pain and sacrifice. 

For managers in the coming hard year(s), a 2009 resolution to be compassionate and to have the courage to lead is a fulsome promise. We have heard the bad news and read about the excuses. It is now our turn to go out and do the right things for our community of colleagues and families, who have stayed with us through the good times.

Happy New Year!

DR DON BHASAVANICH is a counsellor at the Thailand Management Association. He can be contacted at dbhasa@gmail.com. Follow his articles every first Wednesday of the month.