• The Cardano Way in practice

    We want to help institutions become resilient to the whims of the financial markets, yet still able to achieve their objectives through better use of existing investment tools. We use this philosophy when working with pension funds, insurance companies and other financial organisations across Europe but also to developing banking and financial services in developing and frontier markets.

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  • Risk is essential to progress

    Without it, and the flow of resources it generates, the entrepreneurial ventures behind much human activity would cease.

    These include services that help billions of people throughout their lives – the mortgage on their first house, the pensions that fund their retirement and the insurance for when things go wrong with their house or car.

    Risk is, if you like, the oxygen of progress: utterly essential but always requiring careful management

    Risky? That’s another matter.

    The word ‘risky’ literally means ‘full of the possibility of danger, failure or loss’ - an alarming prospect! If a risk management strategy is about minimising the harm from unacceptable risks, then a ‘risky’ strategy exposes you to outcomes you may not be able to cope with.

    We all saw the devastation that followed the recent financial crisis. Excessive risk-taking led to systemic financial fragility, which then exploded into panic, an economic crash and years of austerity.

    Much of the blame centred on irresponsible financial services providers. Although this is partially true, we believe the root cause of the entire boom/bust cycle is a more general issue about human nature.
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  • Financial stability in an uncertain world

    Here at Cardano, we help organisations reach their financial goals in a stable way, not necessarily by taking less risk but by taking acceptable risks.

    Only by separating those risks that are devastating from those that are acceptable (even rewarding) can organisations meet their long-term financial aspirations. What’s more, the avoidance of deep plunges means that you can achieve a more stable path to growth.

    Since forming in 2000, Cardano’s mission has been to provide exactly this type of robust risk management to our clients. We believe passionately that if financial services as a whole were properly risk-managed in this way they could better support the financial wellbeing of our whole society.

    Too often in financial services, a “hope for the best, prepare for the best” attitude prevails. There’s also a strong tendency to try and predict uncertain events despite the industry’s extremely poor track record in doing so.

    In our view there is no use in being 95% right if the remaining 5% could lead to unprecedented disaster. Our preferred adage is “hope for the best, prepare for the worst”. This won’t exactly set off firecrackers in the boardroom, but it can ensure the organisation reaches its goals. And, after all, that’s what really matters.

    Our philosophy is founded on three basic principles:

    1. Financial institutions must be redesigned to cope with true uncertainty, not just selectively chosen statistics from the recent past or theoretical models
    2. We must stop building investment solutions based on strong (possibly erroneous) beliefs about how the world (especially the financial world) works
    3. Any strategy we implement must be able to reach its intended realistic objectives – often a range of possible outcomes we consider acceptable – this should be the case regardless of your beliefs on how the world works


    Before considering how it’s done, let’s look at the core reasons why it hasn’t happened before.
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  • Why risk is so often mismanaged

    When assessing risk it’s the consequences that count. How much loss could you be exposed to at worst? What would that mean for your organisation?

    Risk is defined as the possibility of an event happening that could have a devastating impact. By the specific term financial risk we refer to the uncertainty that accompanies any kind of work with, or investment in, financial markets.

    What neither of these definitions refers to is the probability of a negative event happening. Assessing probabilities is fine for everyday ups and down, but can be highly misleading when estimating truly devastating or disastrous risks.

    So instead of asking what the probability is of a devastating event happening, you need to ask what the impact would be. In other words, what’s the worst that could happen and what would the consequences be for your organisation?

    This is important because in our experience, over time, the likelihood of extreme and consequential events happening in the financial markets has been severely and consistently underestimated. Crashes occur with inevitable (if not always predictable) regularity.

    So, instead of focusing on supposedly sophisticated models of financial probabilities, it is vitally important to concentrate on the possible consequences instead.

    Simple as this idea is, it represents a radical departure from the financial mainstream.

    Why should this be? Part of the answer lies within the mysterious workings of the human mind.
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  • Risk and the human bias

    There is a strange tendency for people to become more relaxed about risk at just around the time caution would be advisable. Why is this?

    Psychology shows us that most people have difficulty working with money and uncertainty, especially over long time horizons. During the economic good times, organisations become comfortable with their financial position and their appetite for risk increases.

    However, if this complacent attitude persists, they will gradually become more and more exposed to hazardous risks that they are not equipped to withstand – just as the inevitable downturn edges closer. We call this the drift into fragility.

    Unfortunately this ‘fragility’ is barely recognised, either in life or financial theories. Despite regular disastrous outcomes, academics have little to say about the origin of our optimistic bias and ignorance of devastating hazards.

    This tendency is so endemic that when the worst really happens, instead of reconsidering past actions or policies, many people simply blame bad luck.

    In reality, luck has nothing to do with it. A flawed concept of risk and an overly optimistic behavioural bias combine to deliver poor decisions with disastrous consequences.

    So what can we do?
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  • Being more robust and dealing with uncertainty

    Gaining a better understanding of the consequences.

    Disastrous outcomes cannot be avoided by risk management alone. The only way to do this is to become robust and resilient. For many organisations, this means change. The starting point for such a change is in the better understanding of which risks can be tolerated and then whether they should be taken on. To help with this, we must first define: 

    • What does success mean? What is your goal and what do you want to achieve?
    • What does failure mean? What is the worst outcome you can tolerate?

    Once all this is understood it is easier to define what level of unacceptable events or consequences could seriously threaten the institution’s continuity or objectives.

    You can then calculate what is acceptable and hence how to avoid trouble. Within that framework, many sensible risks can be taken to achieve the institution’s goals.

    Remember that we don’t understand the world

    Financial systems, and even financial regulations, are often based on the fundamentally flawed idea that we understand how the world works. We might sometimes think we do, but we don’t.

    We can only guess how a situation might work out at a particular time and we are usually wrong. Why? Because we have trouble accepting how complex the world is, and thus overestimate our ability to predict how events will unfold.

    In the real world extreme market events can harm an institution’s balance sheet in unpredictable ways. Downward spiralling prices in weak markets often coincide with other adverse events such as higher funding costs, extreme liquidity risks, counterparty failures and unexpected product failures.

    This interdependency of adverse events can cause losses greatly in excess of those predicted when events are considered in isolation.

    Additional measures must be taken to properly anticipate and reduce the risk of these combined effects.

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  • Three steps to a resilient institution and achieving a more predictable future

    Simple steps can be taken to help you work towards a more robust and predictable future. They will greatly reduce your exposure to the most damaging risks.

    A sound strategy can be built by using the following foundations:
    1. Avoiding devastating risks through a planned, risk-management based approach to extreme events
    2. Basing your risk assessments on the consequences for your organisation of these events taking place (which can be measured and mitigated), not on probability predictions (which often bear no relation to the true level of uncertainty). Included in this should be an understanding of the interdependencies between different risks and how these can go the wrong way.
    3. Using all available insights from behavioural science to avoid the pitfalls of making decisions in uncertain conditions. In particular there must be an organisation-wide commitment to minimising behavioural biases such as over-optimism

    A sound strategy also needs sound implementation.

    Without it, unexpected losses could occur which undermine the strategy. In other words you must avoid an implementation gap. For example when working with pension funds, this means not only working top–down (from developing strategy to appointing managers) but also bottom up (ensuring the total risk across all managers is acceptable). Without bottom up processes, strategy gradually disintegrates from lack of effective implementation.
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  • Services

    Helping pension funds, insurance companies and other organisations become more resilient and stable.

  • Cardano Development

    Improving the robustness and resilience of financial systems of developing and frontier countries.

  • Cardano Insights

    Growing the understanding of responsible financial management.