IBM Risk Analytics

The Social Media World: and What Risk Can Learn From it

by David Bester

By now you’ve likely watched or heard of “Kony 2012”. This short film is part of an online campaign to have Joseph Kony arrested and transferred to the International Criminal Court for outstanding warrants of war crimes. Within six days, the video surpassed 100 million views. This is the fastest trip for a video to the 100 million milestone, eclipsing Susan Boyle’s famous appearance on Britain’s Got Talent by three full days.

In the context of social media campaigns and viral videos, “Kony 2012” is an unqualified smash. An item appeared out of nowhere and through the ability of people to tweet, like, rebroadcast and embed the video on blogs and profiles, it quickly gained global attention. In finance, this type of unexpected event would more likely be viewed as a systemic threat.

With its seemingly effortless ability to transparently handle millions of pieces of data pulled from multiple platforms, social media seems well equipped to handle elements that financial risk management struggles to achieve. TH!NK connected with three thought leaders to discuss the impact and structure of social media, and to learn how their insights can be leveraged for the offline world.

LESSON #1: STAY LOOSE

Martin Thomas is a UK-based freelance marketing consultant and writer with an extensive background in advertising, PR, sponsorship, and digital media. One of his particular interests is organizational culture and how social media influences it. This is a main theme in his latest book, Loose.

In the book’s early chapters, Martin cites an example of how organizations have moved away from empowering workers towards prescriptive behaviors. Nordstrom, the Seattle-based department store, developed a unique welcome package for new hires. For 25 years the entire employee manual was printed on a small card that contained one rule: “use good judgment in all situations”. This iconic message is still part of the welcome package, but is now accompanied by a thicker handbook of rules and regulations.

“Over 20 years, organizations have allowed this bureaucracy of tightness to develop, where people are asked to fill in ever more forms, and we’re harboring ever more compliance officers in order to feed this huge, tight machine that’s built up. And I started to wonder – how does this machine make business any better? What have the benefits been?” asks Martin.

Over the course of his research, Martin observed that ‘tight’ organizations – ones that are heavily bureaucratic and process-driven – are ill equipped to respond quickly to new events. This inflexibility is made even clearer when contrasted against social media’s ability to impact political, social, and commercial agendas without formal leadership. This influence is driving new behaviors and expectations that cannot be met by organizations operating with an illusion of certainty.

“The danger is complacency,” he explains. “Risk can be mitigated, but what you tend to find is that the organizations that deal with risk best have the ability to improvise. And the ability to improvise is not correlated with the ability to fill out forms.”

Discussions of corporate culture and empowerment have existed for decades. But today new technologies and complexities in the workplace are drivers forcing organizations to confront structural issues directly. Social media platforms in particular highlight how being tight or inflexible is incompatible with the expectations of digital delivery.

“Rules and guidelines, written with the very best of intentions, led one organization to take 10 days to approve and issue a 140-character tweet. It’s ridiculous when you think of the timescale, but this is a byproduct of a tight corporate structure going through its practices.”

In tight organizations, decision makers seeking to simplify operations through rule making may be setting themselves up to fail. In an enterprise structure, it is impossible to micromanage every last detail. In these situations judgment and trusting your team can produce far more successful outcomes, particularly when the abilities to improvise and operate in close to real time are highly valued.

“Managers in tight organizations have grown terrified about judgment. Yet, having spent a lot of time looking at organizations that seem to be thriving in our world, and the ones leading that charge are not characterized by the largest budget or the best technology, but rather by a loose mindset.”

“Risk can be mitigated, but what you tend to find is that the organizations that deal with risk best have the ability to improvise.”

In Loose, Martin argues that the future of business is letting go. It may be tougher than being in a tight organization, but a loose structure is better equipped to support collaboration, ambiguity, and living with uncertainty.

“If you don’t trust your back office, and if you’re constantly layering on improvements, it tightens everything up and slows you down. Building systems where you have kept the right people, trained them properly, trust them to make decisions and don’t micromanage them to the nth degree is critical. It prepares people for success by admitting an important truth: the 21st century is not a place for tidy minds.”

LESSON #2: CAPTURE EVERYTHING NATIVELY

Early corporate adopters to online platforms found themselves without a standardized compliance framework. One of the specific challenges with social media is that unstructured content like tweets and videos may not have the space or medium considerations to support regulatory and legal disclosures.

Tom Chernaik, an expert in social media, marketing, and law, set out to solve this problem. Tom is the CEO and founder of CMP.LY, a company dedicated to simplifying the compliance and disclosure process across digital media channels. “It doesn’t matter whether you only have 140 characters, or unlimited bandwidth for a post or a video clip. At an enterprise level there is an expectation that what you post is in compliance with certain guidelines,” says Tom.

Within their first day, CMP.LY came up with a very basic coding framework. Using a set of easily identifiable icons and URLs, CMP.LY provides a standardized way to communicate disclosures across platforms like LinkedIn, Facebook, and blogs. When companies want to live tweet investor calls, they can use CMP.LY to indicate safe harbor statements along with any kind of forward-looking disclosures. A unique trackable code is used to link any information the company shares with a safe harbor statement or equivalent that includes all the relevant statements.

In 2007, a year after Twitter launched, FINRA (Financial Industry Regulatory Authority) issued a guidance requiring brokers to retain all forms of electronic communication. Initially companies responded by taking screen shots of a tweet or blog post, a practice Tom sees is still in use, and one he is actively trying to help companies overcome.

“What people don’t realize is that a screenshot of a social media engagement fails to capture any of the relevant information or metadata kept around the original post. And then, this screen shot is filed away somewhere and it becomes a horrific, manual process later on not only to locate the image, but to try and reverse engineer where it came from, who authored it, and what related posts it should be connected to for context. With the volume of online data and the timescales demanded by real time interaction, this isn’t practical. There are much more elegant solutions available.”

Social media conversations, like collateral and trade agreements, contain high volumes of detailed information. When a different language or platform is used to document the item’s metadata, the harder it is to recreate all the relevant threads. Capturing all relevant information natively, ideally during the original posting or inputting phase, can dramatically enhance the auditable trail required for tracking and reporting purposes.

As social media and digital compliance evolve, agencies like FINRA, the SEC and the Office of Fair Trading in the UK will develop best practices and guidelines about what is and isn’t acceptable in the digital media sphere. Tom is confident this will occur, but doesn’t think a lack of prescriptive clarity should prevent organizations from moving into the social world.

“Let’s admit that, for the foreseeable future, this is a space that is not going to be extremely well defined. Coming up with your own definitions of reasonable monitoring and taking ownership over your programs is the best way to manage the risks in this space, yet still take advantage of the enormous potential.”

LESSON #3: FOCUS ON THE HAYSTACK

Crimson Hexagon is a company that uses statistical theory to analyze unstructured text. The company’s technology was developed by Gary King, the company’s co-founder, Chief Scientist, and a Professor at Harvard University.

“The way that human beings understand large amounts of documents, either social media posts or financial transactions, is that we put them into categories. Then we try to figure out how many are in each category,” Gary says.

When you enter a search on Google, their engine takes all the world’s websites and classifies them into two categories based on your query: the ones they are going to show you, and everything else. Gary estimates that the initial return provides something you’re interested in on the first page about 60% of the time, and this is sufficient for static pages. Unfortunately this method doesn’t translate well into searches for the unstructured data of social media.

“Imagine you’re searching for opinions on a new consumer product feature, and you estimate that 10% of posts will reflect a negative response. But our assumption of 60% accuracy also means we assume 40% inaccuracy. Instead of the 10% estimate you started with, the truth could be 50%. You soon realize you are gathering useless information.”

“The way that human beings understand large amounts of documents, either social media posts or financial transactions, is that we put them into categories. Then we try to figure out how many are in each category.”

Gary and his team used every computer science method they could get their hands on to try and stack posts into different categories. They determined that available classifiers didn’t work at all, and that they didn’t really want to focus on classifying any individual post. What Gary and his team created is a method to estimate the percent in a category without requiring individual classification. By changing the approach, they have radically changed the outcomes as well.

Crimson Hexagon can tell you the fraction of opinions about a company, or whatever the set of categories selected, in social media posts. “We can’t classify responses, but if you’re interested in understanding what conversations are taking place online, we can give better estimates than anybody. We don’t care about the needle in the haystack. We care about the haystack.”

In an attempt to enhance their analytics, many companies have tried to create code that anticipates each potential variable. Gary refers to this approach as the world’s largest ‘if’ statement. For social media, this may include classifying a statement as positive unless it ends with ‘not’ or a smiley face, indicating sarcasm. “You can imagine writing that set of instructions, and that it can work. But it will be tuned so carefully and specifically to one application that by the time you’re done it will be many years into the future and it won’t apply to any other data set. It doesn’t transfer basically.”

Gary cites an example of trying to anticipate words that would describe a positive movie review. You may consider ‘spectacular’, ‘sensational’, ‘great’ or ‘best’ as obvious choices. As it turns out, one of the words that best predicts a positive movie review is ‘still’.

“There’s no logical reason to predict that: it just turns out movie reviewers like to write things like, ‘the direction was lacking and the script was horrible, but still…” Instead of building ‘if’ statements, Crimson Hexagon’s technology assembles information from unstructured text, sometimes audio and video, and many types of proprietary information streams into categories – so that humans can focus on what we do best, which is reading and understanding.

“The qualitative information that people pour over, such as analyst reports and company reports, and any kind of conversations taking place within organizations, are incredibly valuable. It turns out we can understand and analyze these sources in a systematic way now.”

As an industry, financial services have been slow to embrace social media. While more firms are developing a digital presence each year, compliance concerns, a constantly changing landscape, and uncertainty about ROI remain barriers to entry. This doesn’t prevent us however from noticing some similarities between the technological evolution of both industries.

In both finance and digital media, new technologies enabled global networks to develop. An array of different platforms emerged, some new and some built upon legacy systems. The evolution of these data streams present complications for measurement, compliance, and acquiring actionable insights.

From the earliest days of their brief history, online platforms have enabled users to communicate with each other in or near real time, and share detailed information in a variety of formats. There is a growing expectation for this type of access within financial services and society in general. Staying loose, capturing information natively, and focusing on the big picture are three areas organizations can explore to reconstruct successful principles from the social world.