What was needed
Applying Common Sense At Scale
The need to assess complex underlying business risks is rooted in common sense. If decision-makers had the ability to look at each individual risk, one by one, they could simply use reason to come to the right conclusion. But, when looking at large, interrelated and complex situations, companies need a way to scale their judgment to account for hundreds and thousands of interactions – and do so automatically and in real-time.
Traditionally, statistics have been used to assess business risk. But, this is less effective in cases where the available data is insufficient for modeling. As we learned in the 2007 subprime mortgage crisis, simple statistical models for loan default risks had difficulty accurately assessing complicated portfolios with many assets (fractal bundles of loans) and ignore fundamental changes to underlying dynamics. Businesses and investment managers - like those of collateralized loan obligations, or CLOs - need a more effective way to gage and respond to risk. That's where MOKA's Economic Graph can help.
Take for example, the impact of an emerging public health issue on tourism. In 2016 there was widespread concern about how the Zika virus might affect tourism industry as it spread into new areas like the Caribbean and South Pacific. CLOs with exposure to these regions might be especially vulnerable. But with potentially thousands of underlying assets bundled within a portfolio, assessing relevant factors – such as the location of properties, seasonal travel rates and tourist preferences – would be time-consuming and inexact. An analysis of multiple interconnected factors, at scale and with speed, would be needed to determine the level of risk and what actions were warranted. This kind of multi-dimensional challenge is a good example of how MOKA’s Economic Graph can provide the practical clarity an executive needs in order to make effective decisions.
What we did
Demonstrating Connections and Consequences
The Economic Graph draws upon three key elements as inputs into our risk analysis. First, it incorporates company specific information, such as what hotels are owned by a company or what partnerships the company might have with other travel businesses. Second, it utilizes a concept network to describe the relationships between factors – for example, comparing the location of a company’s hotels to popularly trending tourist destinations. Finally, it layers in “what if” scenarios – such as the the effect on Caribbean tourism rates based on the spread of Zika.
By modeling the problem in this way, it becomes easy to understand the interconnections between multiple factors. In this simplified example, Zika is shown to negatively impact Starwood because it operates the Westin Key West in Florida. For the operator of a single hotel, this analysis would be straightforward. But, for a CLO with exposure to a multitude of assets, the Economic Graph would enable common sense analysis at scale.
The Economic Graph builds on the conceptual model of a “graph” or “network” as popularized by Facebook and LinkedIn. But, where existing network models tend to operate at a single level, the MOKA Economic Graph is able to incorporate implications across vast layers of data. It addresses the interconnections of data and concepts at multiple levels – for instance, by looking at both macro and microeconomic factors.
To allow for easy usability, the Economic Graph offers a semantic layer, which encodes what the data means. This allows our intelligent platform to draw conclusions and answer questions. It allows users to add new concepts based on what’s relevant to their problem. In the case of Zika’s impact on hotel reservations, this meant looking at consumer trends, such as vacation hot spots, and measuring trends for specific groups and/or localities – such as the number of Germans vacationing in Florida in a given month.
When applied to the right data, the MOKA Economic Graph allows an analysis that typically would have taken weeks to be run in minutes or even seconds. And, rather than a “black box” solution that hides the specifics, the MOKA Economic Graph provides a “white box” approach that allows users to drill into the conclusions with a clear understanding of the results.
Delivering the Clarity to Act
The MOKA Economic Graph combines sophisticated functionality with a simple but powerful premise: It performs the same common sense analysis that you might do on a case by case basis, but applies it to considerably more complex data sets and contexts. In this sense, the Economic Graph can be thought of as an intelligent extension of one’s own business acumen. It delivers confidence in analysis precisely because it builds on one’s own thinking and common sense, but at a much larger scale. Users are able to adapt fluidly to new information, and enhance their analysis by identifying blind spots or incompatibilities in assumptions.
The solution is designed to answer questions essential to your business. For example, in the case of a CLO manager asking “How will my portfolio be affected by Zika?” the Economic Graph helps to solve a fundamental business conundrum.
Determining the potential impacts of Zika on hospitality assets is just one example. The Economic Graph can be used to address a full range of business challenges where the interconnections might not be immediately apparent. For example, how would a downturn in oil and gas exploration impact an industrial construction equipment manager? How would a REIT be affected by a seemingly unrelated impact to a regional economy, such as a large employer closing a factory? How will two competing beverage trends - one towards juice and another towards flavored waters - ultimately play out?
The Economic Graph equips business decision-makers to strengthen and scale their analysis by quickly addressing large data sets and accounting for the sometimes unseen connections among that data. Whether it’s a CLO wanting to understand risks to its underlying assets, a company judging its exposure to changes in other industries, or a consumer goods provider trying to achieve more accurate growth projections, the MOKA Economic Graph helps to scale common sense and sound business judgment. It’s the power of practical clarity applied in real time, to inform critical decisions for business leaders.