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Financial risk management is hard to get right even in the best of times. It can take one of six paths to failure, nearly all of them exemplified in the current crisis. Relying on historical data. A risk manager who assessed real estate risk on the basis of statistics from the past three decades would have been sorely unprepared for the volatility of house prices in 2007. Focusing on narrow measures. A daily Value-at-Risk (VaR) measure is commonly used for securities trading. But a daily measure assumes that assets can be sold quickly or hedged, so it doesn't apply to portfolios with which the firm may be temporarily stuck. Overlooking knowable risks. Risk managers often distinguish among market, credit, and operational risks, which they measure differently and in isolation rather than cross-organizationally. They may also fail to assess new risks embedded in the instruments they use for risk mitigation. Overlooking concealed risks. Risk takers may deliberately hide their risks, as happened at the French bank Societe Generale in 2007. Or they may underreport them when their trading positions are complex and short-lived. Failing to communicate. Sometimes even the most scrupulous risk manager cannot clearly explain a state-of-the-art system to the CEO and the board. In such a case, their confidence in the system's capabilities may be unwarranted. Not managing in real time. It is difficult to hedge trading positions when their risk characteristics can change completely within a single day - as can happen, say, with barrier calls. The author advises practicing sustainable risk management: Never mind that catastrophic risks have extremely small probabilities; build scenarios for them and design strategies for surviving them anyway.

All companies making big-budget investment decisions face the same basic dilemma: On the one hand, they must make timely, strategic investments to prevent rivals from gaining ground. On the other, they must avoid tying up too much cash in risky projects, especially during times of market uncertainty. The traditional valuation methods - namely, discounted cash flow and real options - fall short in resolving this dilemma. Neither one, on its own, properly incorporates the impact of demand and price volatility in an industry while also taking into account additional investments that the firm and its competitors may make. In this article, Nelson Ferreira, an associate principal at McKinsey & Company in Sao Paulo; Jayanti Kar, an associate at McKinsey & Company in Toronto; and Lenos Trigeorgis, a professor of finance at the University of Cyprus and the president of the Real Options Group, present a valuation tool that overcomes the shortfalls of those analytic approaches. The tool, called option games, combines real options (which predict the evolution of prices and demand) and game theory (which captures competitors' moves) to quantify the value of both flexibility and commitment, allowing managers to make rational choices between alternative investment strategies. Option games will be of particular value to companies facing high-stakes decisions, such as those involving millions of dollars in capital investment, in a volatile environment in which their moves and those of their competitors clearly affect each other.

Countries around the world are putting innovation at the top of their agendas. As a result, companies now have access to a global market for talent, capital, tax credits, and regulatory relief. Before setting up a research laboratory or a marketing office in one of the world's innovation hot spots, organizations must consider which of the emerging innovation models best suit their requirements. An astute company can also blend elements of each model in a systems integration approach. In the focused factory model, countries concentrate their resources. Singapore, for instance, plans to increase funding for R&D in life sciences, clean technology, and digital media, and to provide benefits such as tax relief to attract companies interested in conducting research in those areas. GlaxoSmithKline and Novartis have already begun doing so at the biomedical research center Biopolis. Countries adopting the brute force model hope to generate innovations by marshaling massive amounts of labor and capital. China, for example, is increasing funding for 10 universities in order to produce many specialists in every area of science and technology. The goal of the Hollyworld model is to create the right environment for innovation by assembling a critical mass of skilled individuals. India, for example, is partnering the best graduates of its universities with Indians who have trained at educational institutions in the West. Several countries have developed large-scale ecosystems combining funding bodies, research institutions, and business and academic collaboration. Finland's innovation system, for instance, is bolstered by strong governmental stewardship and the involvement of public and private players. Aalto University, scheduled to open in the autumn of 2009, will exemplify the country's holistic approach.

Economic incentives become counterproductive when they undermine what Adam Smith called "the moral sentiments," such as the desire to be esteemed by others and to be viewed as ethical and dignified. Organizational and social policy makers, take note.

Below $10,000 per capita, a country's income can grow even in the absence of good institutions. But at higher income levels, as China will soon discover, institutional quality starts to matter quite a lot.

Unlike traditional market researchers, who use highly targeted questions to extract information from customers, corporate ethnographers observe and listen in a nondirected way. Their method may appear inefficient, but it can yield rich data about product use.

The best business books from the past 30 years offer simple yet profound advice for overcoming five recurring challenges. The lessons are strikingly similar to those learned by the heroes of mythology and popular culture.

Past economic crises curbed executive compensation - but only temporarily. Companies continue to shell out hefty sums, even when performance is poor.

When there's limited cash for financial rewards, praise becomes an acutely valuable management tool. Through careful positive feedback, you can induce employees to chain several good efforts together into a pattern of excellence.

Executives need to face seven truths about the waste in their IT budgets. Here they are, along with some strategies for managing each one.

If your innovation efforts need a shot in the arm, try emulating the medical researchers who seek cures for diseases by examining cells for unexpected commonalities. You might find answers to some of your most confounding business problems by looking for relationships among wildly different products or solutions.

The chairman and CEO of DineEquity, the restaurant company that owns the Applebee's and IHOP brands, says the key to managing for performance across more than 3,300 sites is to turn the workplace into a classroom. "When employees feel like they're learning," she says, "they become more enthusiastic about their work, and that shows through to the customer in a hundred different ways."

Our annual survey of ideas and trends that will make an impact on business: Elizabeth Warren and Amelia Tyagi believe consumer credit should be made as safe as any other product. Paul Collier and Jean-Louis Warnholz reveal an increasingly investment-friendly climate in sub-Saharan Africa. Amy J.C. Cuddy asserts that warmth and competence are not mutually exclusive. John Sviokla predicts a surge of peer-to-peer lending in the wake of the financial crisis. Noah J. Goldstein explains the impact of social pressure on customers' behavior. Raymond Fisman urges the creation of a global forensic economics lab modeled on Interpol. Paul Saffo warns of a brain drain out of the U.S. Gurdeep Singh Pall and Rita Gunther McGrath contemplate the ramifications of immortalizing business meetings in searchable, high-quality digital video. Janine M. Benyus and Gunter A.M. Pauli illustrate the advantages of innovation copied from nature. Michael I. Norton observes that an investment of effort can lead to unduly glorifying its results. Peter Schwartz dispels the illusion that global temperatures are actually falling. Nicholas A. Christakis shows that personal influence wanes beyond three degrees of separation. Marcelo Suarez-Orozco sees the migrant millions as untapped brand emissaries to their relatives back home. Ian Bremmer and Juan Pujadas chart the growing influence of state capitalism in four industry sectors. Steve Jurvetson shares a fun way to stimulate the growth of new brain cells. Lew McCreary spotlights the interior designs of two adventurous architects who aim to counteract the degenerative effects of physical comfort. Tom Ilube explains the semantic web - a quiet revolution in technology that will radically change the internet. Alex Pentland weighs the benefits of combining two distinct kinds of social networking. Thomas H. Davenport and Bala Iyer look at the offshore outsourcing of decision making. R. Stanley Williams envisions a central nervous system for the earth.

Downturns offer a rare opportunity to outmaneuver rivals. But to do so, you must first systematically assess your organization's ability to weather the storm and take corrective action. David Rhodes and Daniel Stelter, of the Boston Consulting Group, offer a comprehensive approach to tackling this simultaneously defensive and offensive challenge. For some companies, the outcome of this process will be a program of immediate actions that represent a turbocharged version of business as usual. For others, it will be a painful realization that nothing short of an urgent corporate turnaround will suffice. To stabilize the business, companies must (1) protect their financial fundamentals by, for example, monitoring and maximizing cash flow, managing customer credit risk, reducing working capital, and optimizing their financial structure and financing options; (2) protect their existing business operations by reducing costs, increasing organizational efficiency, aggressively managing the top line, rethinking their product portfolio and pricing, reining in investment plans, and divesting noncore businesses; and (3) work to maximize their valuation relative to rivals by being proactive in their investor relations and favoring dividends over share buybacks. To seize advantage, companies must make farsighted investments, identify opportunistic and potentially transformative mergers, and consider possible redefinitions of their business models. This recession handbook will help companies not only to survive the recession but also to thrive in its aftermath.

Decision making lies at the heart of our personal and professional lives. Yet the daunting reality is that enormously important decisions made by intelligent, responsible people with the best information and intentions are nevertheless hopelessly flawed at times. In part, that's due to the way our brains work. Modern neuroscience teaches us that two hardwired processes in the brain - pattern recognition and emotional tagging - are critical to decision making. Both are normally reliable; indeed, they provide us with an evolutionary advantage. But in certain circumstances, either one can trip us up and skew our judgment. In this article, Campbell and Whitehead, directors at the Ashridge Strategic Management Centre, together with Finkelstein, of Dartmouth's Tuck School, describe the conditions that promote errors of judgment and explore how organizations can build safeguards against them into the decision-making process. In their analysis, the authors delineate three "red-flag conditions" that are responsible either for distorting emotional tagging or for encouraging people to see false patterns: conflicts of interest; attachments to people, places, or things; and the presence of misleading memories, which seem, but really are not, relevant and comparable to the current situation. Using a global chemical company as an example, the authors describe the steps leaders can take to counteract those biases: inject fresh experience or analysis, introduce further debate and more challenges to their thinking, and impose stronger governance. Rather than rely on the wisdom of experienced chairmen, the humility of CEOs, or the standard organizational checks and balances, the authors urge, everyone involved in important decisions should explicitly consider whether red flags exist and, if they do, lobby for appropriate safeguards.

Managers regularly implement new ideas without evidence to back them up. They act on hunches and often learn very little along the way. That doesn't have to be the case. With the help of broadly available software and some basic investments in building capabilities, managers don't need a PhD in statistics to base consequential decisions on scientifically sound experiments. Some companies with rich consumer-transaction data - Toronto-Dominion, CKE Restaurants, eBay, and others - are routinely testing innovations well outside the realm of product R&D. As randomized testing becomes standard procedure in certain settings (website analysis, for instance), firms learn to apply it in other areas as well. Entire organizations that adopt a "test and learn" culture stand to realize the greatest benefits. That said, firms need to determine when formal testing makes sense. Generally, it's much more applicable to tactical decisions (such as choosing a new store format) than to strategic ones (such as figuring out whether to acquire a business). Tests are useful only if managers define and measure desired outcomes and formulate logical hypotheses about how proposed interventions will play out. To begin incorporating more scientific management into your business, acquaint managers at all levels with your organization's testing process. A shared understanding of what constitutes a valid test - and how it jibes with other processes - helps executives to set expectations and innovators to deliver on them. The process always begins with creating a testable hypothesis. Then the details of the test are designed, which means identifying sites or units to be tested, selecting control groups, and defining test and control situations. After the test is carried out for a specified period, managers analyze the data to determine results and appropriate actions. Results ideally go into a "learning library," so others can benefit from them.

Competing in volatile markets feels a lot like boxing: Punches come from all directions; strategies change constantly; and one powerful blow could knock out your company at any moment. As firms fight their way through tumultuous times, they can learn much from boxing champions. London Business School professor Donald Sull outlines two fundamental approaches to mastering uncertainty - agility and absorption - using the classic "Rumble in the Jungle" between Muhammad Ali and George Foreman to illustrate them. Both capabilities can help companies survive turmoil. Agility, exemplified by Ali, is the ability to quickly spot and exploit opportunities. It comes in one of three forms: operational agility, the capacity to seize opportunities to improve operations and processes within a focused business model; portfolio agility, the ability to shift resources out of less-promising units and into attractive ones; and strategic agility, the ability to jump on game-changing opportunities. Each kind of agility is enhanced by a distinct set of assets and leadership priorities. Absorption, exemplified by Foreman, is the strength to withstand punishment and weather sudden shifts. Sull describes 10 ways that companies can build absorption, including capitalizing on size, diversifying assets, and stockpiling a war chest of cash. Balancing agility and absorption is critical. Apple's iPod is an excellent example of agility, but it was absorption - in the form of a small core of fanatical customers - that kept the company going during the 1990s, when its market share shrank dramatically. Those customers kept Apple alive until changes in context created its golden opportunity. Ali won the Rumble by maintaining his agility while enhancing his absorption. Companies that follow his lead and cultivate both capabilities increase their chances of emerging from turbulence as new market leaders.

In May 2008, a group of management scholars and senior executives worked to define an agenda for management during the next 100 years. The so-called renegade brigade, led by Gary Hamel, included academics, such as C.K. Prahalad, Peter Senge, and Jeffrey Pfeffer; new-age thinkers, like James Surowiecki; and progressive CEOs, such as Whole Foods' John Mackey, W.L. Gore's Terri Kelly, and IDEO's Tim Brown. What drew them together was a set of shared beliefs about the importance of management and a sense of urgency about reinventing it for a new era. The group's first task was to compile a roster of challenges that would focus the energies of management innovators around the world. Accordingly, in this article, Hamel (who has set up the Management Lab, a research organization devoted to management innovation) outlines 25 "moon shots" - ambitious goals that managers should strive to achieve and in the process create Management 2.0. Topping the list is the imperative of extending management's responsibilities beyond just creating shareholder value. To do so will require both reconstructing the field's philosophical foundations so that work serves a higher purpose and fully embedding the ideas of community and citizenship into organizations. A number of challenges focus on ameliorating the toxic effects of hierarchy. Others focus on better ways to unleash creativity and capitalize on employees' passions. Still others seek to transcend the limitations of traditional patterns of management thinking. Not all the moon shots are new, but many tackle issues that are endemic in large organizations. Their purpose is to inspire new solutions to long-simmering problems by making every company as genuinely human as the people who work there.

Although most managers can recognize an off-kilter leader (consider the highly supportive boss who cuts people too much slack), it's quite difficult to see overkill in yourself. Unfortunately, that's where leadership development tools such as 360-degree surveys fail to deliver, say Kaplan and Kaiser. Dividing qualities into "strengths" and "weaknesses" and rating them on a five-point scale will not account for strengths overplayed. The authors suggest several strategies, based on their years of consulting experience and research, for figuring out which attributes you've employed to excess and adjusting your behavior accordingly. Strengths taken too far have two consequences: First, they become weaknesses. For instance, quick-wittedness can turn into impatience with others. Second, you're at risk of becoming extremely lopsided - that is, diminishing your capacity on the opposite pole. A leader who is very good at building consensus, for example, may take too long to move into action. To strike a balance between two key leadership dualities - forceful versus enabling, and strategic versus operational - you need to see your actions and motivations clearly. That's no easy task since most leadership development tools don't spell out that you're overdoing your strengths. But there are other ways to bring that information to light. You can start with a review of the highest ratings on your most recent 360 report. Ask yourself: Is this too much of a good thing? Another technique is to make a list of the traits you most want to have as a leader. Are you going to extremes with any of them? To check for lopsidedness, you can prompt feedback from other people with a list of qualities you've composed or one you've gleaned from other sources. Once you know which attributes you're overdoing, you can recalibrate.

Public Private Partnerships (PPP) have emerged as one of the major approaches for delivering infrastructure projects effectively. This article develops a PPP framework for infrastructure development. It discusses examples of worldwide applications, as well as benefits and obstacles of PPP through a literature review on PPP-related research over the last 20 years. The syntheses of the knowledge present foundations from which the laws, regulations, and guidelines for effective and successful PPP implementation can be established. This analysis reveals that PPP can create new and long-term business opportunities with a chance to deliver infrastructure services of higher quality and efficiency. However, these benefits will only be materialized when a PPP project is properly planned and managed and both the public and private sectors work together successfully.