1. RISK – CAN IT BE MEASURED AND
MANAGED?
September, 2010
Prepared by Elizabeth H. D’Elia
2. Definition of Risk
“Risk means in some cases a quantity susceptible of
measurement, while at other times, it is something distinctly
of its character…” (Prof Frank Knight)
“future, uncertain event that may cause harm or damage”
(English dictionary)
“Future uncertainty that may be either threatening , or
opportunistic, or both…” (Ned Robins)
“Future uncertain event that may be either threatening, or
opportunistic, of both…” (Ned Robins)
3.
4. Types of Risk
Operational
Fraud
Financial
Economic / Political
Legal / Regulatory
HUMAN BEHAVIOUR x TOO MUCH FAITH IN
COMPUTERS ??
5. How to Measure & Manage Risks
Can risk be measured?
Or do we want risk to be predicted, instead of measured ?
Or do we want risk to be properly priced ?
Or all of the above?
HOW TO TRANSFORM RISK IN OPPORTUNITY
6. Risk as Opportunity
Willingful blindness: who wants to be the first to say NO to a
profitable deal?
“We must dance while the music is playing…”
(Chuck Prince)
But, what if the music stops and there are no chairs to sit?
NO risk means no profit....
But, if we do not want to stop then we must price it!
8. Risk Can Be Managed !
Old rules had just been forgotten:
Complexity is a fact…
Models can help in seizing and pricing risks
BUT
Does not count on the Human Factor, and …
the latent interconnected world – contagion risk.
Yes! An estimate is a guess but not a blind guess.
Experience does help but has to be applied
9. Lessons Learned from the Crisis
Or just old rules that had been forgotten?
Feedback drives economic behavior
Concept of sustainable growth / sustainable leverage
Ω Real Economy size is estimated at $ 48Tr while the financial economy
is estimated at $151Tr. What exactly is it financing?
Ω Fannie Mae and Freddie Mac -> core capital of $ 83Bn supported
approximately $5.2Tr of debts and guarantees.
Great models do work, but they still don’t measure human
reaction and/or intention and/or greed
Focus on short term results
Lack of accountability for risk results – know how to measure
profits, and do not penalize losses