Risk: Difference between revisions
Jump to navigation
Jump to search
Amwelladmin (talk | contribs) No edit summary |
Amwelladmin (talk | contribs) No edit summary |
||
| Line 1: | Line 1: | ||
{{a|risk|}} | {{a|risk|}} | ||
====Real==== | |||
===The nature of {{risk|risk}}=== | |||
The real risks are the [[black swan]]s: risks that people don’t recognise as risks until they happen. All significant market dislocations have come from blind spots. [[Known known]]s – about which firms naturally obsess, are not generally risks at all, precisely because they are [[known known]]s and are properly identified, managed and controlled. | |||
[[Black swans]], after they happen, cease to be [[black swan]]s. (“Policy is organisational scar tissue”). | |||
Our constitutional insistence<ref>''[[Stare decisis]]'', anyone?</ref> in reviewing the tape for PAST PERFORMANCE means we obsess about risks in stables from which horses have already bolted. Eg (okay this is my hobby horse) [[close out netting]]. ''Real'' risks [[unknown unknown]]s won’t cleave to the organisational structure, much less the firm’s own [[risk taxonomy]] or division of responsibility for risk management. These things of necessarily, which is based on stables from which horses have already bolted. Therefore [[unknown unknown]]s will tend present across non-contiguous areas of risk management – the same risk might be partly legal, partly credit, partly market risk. Each in isolation may be containable, but combined effect less so. | |||
====Are they real risks?==== | |||
Your risk controller is an individual with powerful personal incentives to see risks that might be paper tigers. As long as they're complex, her [[subject matter expert]]ise will carry her through. But let’s not be cynical. Let us go with it and allow that these are real risks <br> | |||
*[[Tail risk]]s or daily risks'''? Depending on which, the reaction decision differs. | *[[Tail risk]]s or daily risks'''? Depending on which, the reaction decision differs. | ||
*'''Daily risks''': You can reliably predict them, quantify them, average their cost and price them based on observed expected probability. This is what [[insurance]] underwriters do. But they do this across a wide portfolio of individuals who can’t reliably predict the risk. The predictability is an emergent property of the aggregation of the risks — it's a function of {{risk|scale}}. With sufficient scale, you can make a binary decision: | *'''Daily risks''': You can reliably predict them, quantify them, average their cost and price them based on observed expected probability. This is what [[insurance]] underwriters do. But they do this across a wide portfolio of individuals who can’t reliably predict the risk. The predictability is an emergent property of the aggregation of the risks — it's a function of {{risk|scale}}. With sufficient scale, you can make a binary decision: | ||