The Greek word for “risk” is not found in the ancient tragedies, yet those plays are the ultimate case studies in risk management. In his book The Tragic Mind, Robert D. Kaplan argues that tragedy is not about being pessimistic; it is about being realistic regarding the limits of human reasoning.
For the Chief Risk Officer (CRO), this is a vital distinction. In our quest for “Apolline order,” the neat rows of heat maps, VaR calculations, and key risk indicators, we often ignore the “visceral chaos,” or “irrational” disorder, lurking beneath the surface of decision-making.
The Greeks understood something modern finance often forgets: The rational and the irrational are not separate silos. To act rationally, one must have a deep understanding of the irrational.
Brenda Boultwood
To be a great risk manager, one must think tragically. This does not mean becoming a Cassandra, doomed to be ignored, or a nihilist. Rather, it means adopting what Kaplan calls “anxious foresight.” It is the understanding that the most catastrophic failures in financial history – from the Great Financial Crisis, to the collapse of Archegos, to the 2023 regional banking crisis – were not “black swans” but rather the result of a failure to respect the constraints of reality.
Rational behavior, both today and in the time of Sophocles, is a fragile thing. It is not our default state; it is a temporary achievement. A thin veneer of order is often stretched over and constraining the irrational impulse. To be a great CRO is to recognize that the analytics are incomplete if they do not account for possible irrationality.
Risk assessment and analysis can be treated as a mechanical exercise. We list risks, we score them, and they often become compulsory compliance checklists untouched in stale risk reports or a shared network drive. However, tragic thinking suggests that risk analysis must be an endeavor akin to “peeling the onion” to establish a ground truth. It’s an exercise in creativity to “call the ball” and create a common understanding of its possible outcomes, their impacts and corresponding probabilities. It’s dynamic and multiperiod.
The CRO must be able to visualize the transition from the appearance of rational order to the explanation of disorderly chaos. In the financial services industry, this transition can be triggered by a geopolitical event, a loss of liquidity or a sudden shift in market sentiment. Tragic thinking requires us to look at a risk dashboard and ask: What is the narrow path we are walking, where will the lemmings run, where are the other cliffs, and which path offers sustainability?
The figure below illustrates how a CRO uses their “tragic mind” to bridge the conventional, linear world of order with the complex non-linear reality of chaos to produce high-impact risk analysis.
On the left, the CRO’s Apolline order aims to create the appearance of order and visualize the linear predictable outcomes. The order comes through a standard workflow of risk identification, assessment, and reporting of the heatmaps, RAG (red, amber, green) reports, and compliance checklists that create an appearance of order. Arrows from the top of this list to the bottom push into the central risk analysis process as a standard, though superficial, input.
The central “risk analysis process” is depicted as a dynamic, five-step circular flow. Steps 2, 3, and 4 form the transformational core to integrate a “what is possible” analysis, a counter to human evasion with risk appetite, and the creation of ground truth analysis. Step 1 incorporates the Apolline risk management order into this process. The iterative nature of this loop ensures the analysis is meaningful before leading to critical decisions.
On the right, the CRO's tragic mind is displayed as a non-linear mental framework focused on “thinking tragically to avoid tragedy.” A complex hub contains specific cognitive attributes, including Dionysian scenarios, narrow choices, constructive fear, anxious foresight, and awareness of constraints. A powerful downward force visualizes the mind’s ability to resist passions, procrastinations, and evasions, an active mental filter crucial to deep analysis.
The outcome is a ground-truth risk analysis. This analysis is a direct synthesis of process insights and tragic thinking, culminating in a result that actively supports strong decision-making.
The CRO’s tragic mind, illustrated on the right, is the engine of the synthesis between the rational and irrational. It is not enough to have anxious foresight. We must have the courage to acknowledge the madness around us. By incorporating Dionysian scenarios to represent moments of wild, uncontained market fury or internal organizational hubris, the CRO can filter the analysis through a searing awareness of the irrational chaos. This leads to ground-truth risk analysis which is rational precisely because it has accounted for the irrational.
To create a ground-truth risk analysis, the CRO must navigate three central paradoxes:
-- Constructive Fear: In a corporate culture that prizes “optimism,” the CRO’s fear is often seen as a hindrance. Yet, tragedy teaches us that fear is the only rational response to a world of irrational exuberance. This fear is the “Apolline” response to “Dionysian” reality; it is the force that encourages the leader to acknowledge the fragility of their success, and the sustainability of the organization.
-- The Rational Irrationalist: To propose a rational path forward, the CRO must be the person in the room who most deeply understands irrationality. She must be able to model the “madness” of a bank run or the “delusion” of a speculative bubble not as outliers, but as fundamental features of a decision-making environment. A “purely rational” CRO will be blindsided by the first display of “market irrationality” that doesn’t fit her model.
-- Productive Tension: A firm that is purely rational is brittle. It lacks the creative “Dionysian” spark of organizational adaptation and growth. An organization that is purely chaotic and irrational is a catastrophe in waiting. Productivity is found in the fusion. The Greeks did not seek to eliminate the irrational; they sought to give it a place within a tragic framework. The modern CRO does the same for the organization.
One of the greatest threats to financial stability is the human capacity for rationalization and evasion. When profits are high, there is a natural tendency to believe we have “solved” risk. We saw this in the lead-up to the 2008 financial crisis and more recently in the over-concentration of interest rate risk in pension portfolios.
Strong risk analysis, informed by a tragic mindset, serves as the ultimate antidote to any illusion of order. By acknowledging that passion is the enemy of analysis, the CRO can maintain the emotional distance necessary to see the world as it is, rather than how the C-suite wishes it to be.
Look no further than the recent volatility in the private credit sector or the herd behavior in the 2023 regional banking crisis. These were not failures of “math”; they were failures of “psychology.” Analysts had the data, but they lacked the tragic mind to believe the data could lead to irrational investment choices. They stayed within the order of “historical trends” while the world around them was being driven by the madness of social-media-driven deposit flight, an irrational factor that pure reason could not predict, but a tragic mind should have anticipated.
Strong risk analysis must counter the human capacity for rationalization and evasion. When profits are high, the passion for growth becomes an enemy of analysis. The CRO must use their understanding of the irrational to act as the designated thinker of the unthinkable.
A great CRO can think tragically without becoming a pessimistic personality. Much like a doctor who understands the fragility of the body but remains focused on the cure, the CRO uses the tragic mind as a tool for objective appraisal. The CRO understands that reasoned rationality is a hard-won victory that must be defended every day against an irrational decision.
Thinking tragically is both an act of humility and supreme rationality. It is an admission that despite our sophisticated models, we are subject to forces larger than ourselves. By fusing the austerely rational frameworks of risk management with a deep, searing awareness of the irrational nature of human choice, the CRO provides the ground truth necessary for organizational survival.
A firm is most productive when it stops pretending that its employees and markets are rational actors and starts managing them as they truly are: tragic figures navigating a world of irrational actors. The goal is not to escape the madness around us, but to gain the only thing that truly matters in risk management: the time to act before the chaos takes hold.
Brenda Boultwood is the Distinguished Visiting Professor, Admiral Crowe Chair, in the Economics Department at the United States Naval Academy. The views expressed in this article are her own and should not be attributed to the United States Naval Academy or the U.S. Department of Defense.
She is the former Director of the Office of Risk Management at the International Monetary Fund. She has previously served as a board member at both the Committee of Chief Risk Officers (CCRO) and GARP, and is also the former senior vice president and chief risk officer at Constellation Energy. She held a variety of business, risk management, and compliance roles at JPMorgan Chase and Bank One.