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Risk Management 101What is Risk Management?Why Should You Care?What Should You be Doing?
What Is Risk?There are many, even conflicting, terms anddefinitions of Risk:danger possibility perilchance exposurejeopard...
Why Should You Care?• Everyone faces risks• Risks are everywhere• Even when recognized, risks are often poorlyunderstood• ...
Why Are Risks Misunderstood?• We easily succumb to selective validation—thetendency to remember only positive correlations...
Personal Risk AssessmentMile-for-mile and trip-for-trip air travel is atleast 1,000 times safer than driving …
Personal Risk Assessment 2… but an air crash seems much more likely to befatal.
Managing RisksRegardless of definitions, there are 3 agreedsteps to manage risks:1. Identify potential risks2. Assess/meas...
Basic Risk Management ProcessIdentifyRisks andexposuresEvaluateloss potentialand probabilitySelect & ImplementManagement M...
IDENTIFYING RISKSSome People are Lucky
Some People Not So Much
Poo Happens!
Assessing Risks• Few people understand either the probabilityof an event or the consequences• So … most people either unde...
What Is The Likelihood?
What Is The Consequence?
• Humans have a poor innate grasp of probability– For example, what are the odds of two people sharing thesame birthday in...
• Few understand the laws regarding truly largenumbers.– Many people believe in the Gamblers Fallacy, thinkingthat if a to...
Are You Safe?Our sense of "safe" is often distorted by media coverage (or thelack of it) and distance:– The disappearance ...
Road Trip RisksWhat we think…. The usual reality..
Some Probabilities of Mortality• Die from Heart Disease 1 in 280• Die of Cancer 1 in 500• Die in Car wreck 1 in 6,000• Die...
Ineffective Risk Management
The Banks Still Haven’t Figured It OutAfter the “meltdown” of 2008, a reasonable personmight assume that surviving banks a...
And Still Haven’t …• MF Global, the third largest commoditybroker/dealer in the U.S., filed for bankruptcyas a result of e...
What Should You be Doing?Investigate!1. Read the fine print!2. Identify and accurately assess the risks incritical or stre...
And …Be Skeptical!3. Get it in writing4. If you don’t understand an investment ortransaction, don’t make it until you do.5...
• Failure to understand and act appropriatelycan be very costly!• Knowledge is protection!
Answer These Key Questions
Why Are You Doing Whatever It Is?
Are You In The Right Place?
At The Right Time?
With The Right Tools?
To Avoid Disaster?
Or Not?
Risk management 101
Risk management 101
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Risk management 101

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A whimsical look at Risk Management

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Risk management 101

  1. 1. Risk Management 101What is Risk Management?Why Should You Care?What Should You be Doing?
  2. 2. What Is Risk?There are many, even conflicting, terms anddefinitions of Risk:danger possibility perilchance exposurejeopardy consequence hazardmenace threatgamble OPPORTUNITY
  3. 3. Why Should You Care?• Everyone faces risks• Risks are everywhere• Even when recognized, risks are often poorlyunderstood• Bad – even catastrophic – things happen whenRisks are not managed!
  4. 4. Why Are Risks Misunderstood?• We easily succumb to selective validation—thetendency to remember only positive correlations andforget the far more numerous misses.– A common ploy used by psychics (often called the JeanneDixon effect) is to make dozens of predictions to increasethe odds that one will hit. When one comes true, thepsychic counts on us to conveniently forget the 99% thatwere way off.– In investing -- and gambling -- most people remembertheir big win, and forget the many losses that more thanoffset it– Potentially bad outcomes are weighted much more heavilythan mildly bad ones – even when the likelihoods are verydifferent
  5. 5. Personal Risk AssessmentMile-for-mile and trip-for-trip air travel is atleast 1,000 times safer than driving …
  6. 6. Personal Risk Assessment 2… but an air crash seems much more likely to befatal.
  7. 7. Managing RisksRegardless of definitions, there are 3 agreedsteps to manage risks:1. Identify potential risks2. Assess/measure the threat3. Eliminate, mitigate, transfer or accept
  8. 8. Basic Risk Management ProcessIdentifyRisks andexposuresEvaluateloss potentialand probabilitySelect & ImplementManagement Method
  9. 9. IDENTIFYING RISKSSome People are Lucky
  10. 10. Some People Not So Much
  11. 11. Poo Happens!
  12. 12. Assessing Risks• Few people understand either the probabilityof an event or the consequences• So … most people either underestimate thelikelihood of improbable events …• Or they overestimate the consequences ofeveryday risks …
  13. 13. What Is The Likelihood?
  14. 14. What Is The Consequence?
  15. 15. • Humans have a poor innate grasp of probability– For example, what are the odds of two people sharing thesame birthday in a room containing twenty three people?Many think it must be one in thirty or more. Surprisingly tomost people, it is only one in two.– Theres a 100 percent chance of an earthquake todaysomewhere in the world!
  16. 16. • Few understand the laws regarding truly largenumbers.– Many people believe in the Gamblers Fallacy, thinkingthat if a tossed coin ends up “tails” an inordinate numberof times in 100 trials, then “heads” is bound to come upmore often in 100 subsequent trials to “even up” the scoreand return to a 50-50 distribution.– But – the odds of tossing “tails” is still 50% each time; thecoin has no “memory” of what happened previously.• A widely accepted law of statistics states that with alarge enough sample size, even the extremely unlikelybecomes probable, and therefore any outrageousthing is bound to happen eventually – even 100“tails” in a row!
  17. 17. Are You Safe?Our sense of "safe" is often distorted by media coverage (or thelack of it) and distance:– The disappearance of Natalee Holloway gained worldwide attentionand caused a sharp decline in visitors to Aruba, even though it is thesafest island in the Caribbean – fewer than 1 murder annually.– Your chances of being a victim of foul play are considerably greater inLas Vegas (more than 1,000 murders annually) than Aruba, yet no oneis canceling their trip to Las Vegas because of safety.Health issues and terrorism grab the headlines but crime andaccidents pose far greater risks for travelers.– In 2003 48 people died of SARS in Toronto and all of those deaths wereconnected to hospitals. But fear caused hotel occupancy rates toplummet from 87% to 13%.– 80 people died in traffic accidents in Toronto in 2003; but, once again,no one cancelled a Toronto trip for fear of dying in a traffic accident.
  18. 18. Road Trip RisksWhat we think…. The usual reality..
  19. 19. Some Probabilities of Mortality• Die from Heart Disease 1 in 280• Die of Cancer 1 in 500• Die in Car wreck 1 in 6,000• Die by Homicide 1 in 10,000• Die of AIDS 1 in 11,000• Die of Tuberculosis 1 in 200,000• Killed by lightning 1 in 1.4 million• Killed by flood or tornado 1 in 2 million• Killed in Hurricane 1 in 6 million• Die in commercial plane crash 1 in 10 millionYou are at least 1,000 times more likely to be killed on theway to the airport than to die during the flight
  20. 20. Ineffective Risk Management
  21. 21. The Banks Still Haven’t Figured It OutAfter the “meltdown” of 2008, a reasonable personmight assume that surviving banks and brokerageswould institute better risk management proceduresand controls. Far from it! Within the past 2 years …• UBS wrote off at least $5 Billion of losses frommortgage-related debt and derivatives after 2008• AND was stung for another $2+ Billion by a juniortrader who successfully concealed his bad tradesfor more than 2 years.
  22. 22. And Still Haven’t …• MF Global, the third largest commoditybroker/dealer in the U.S., filed for bankruptcyas a result of excessive bets on Euro ZoneSovereign bonds.• $593M of customer funds were apparentlyillegally co-mingled with the firm’s funds andwere officially “missing”.• The bankruptcy is expected to be the 8thlargest in U.S. history.
  23. 23. What Should You be Doing?Investigate!1. Read the fine print!2. Identify and accurately assess the risks incritical or stressful situations.– You are about 10,000 times more likely to haveyour car stolen, than to win a lottery
  24. 24. And …Be Skeptical!3. Get it in writing4. If you don’t understand an investment ortransaction, don’t make it until you do.5. Insure against catastrophe.
  25. 25. • Failure to understand and act appropriatelycan be very costly!• Knowledge is protection!
  26. 26. Answer These Key Questions
  27. 27. Why Are You Doing Whatever It Is?
  28. 28. Are You In The Right Place?
  29. 29. At The Right Time?
  30. 30. With The Right Tools?
  31. 31. To Avoid Disaster?
  32. 32. Or Not?

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