Archive | Risk

Test Your Risk Intuition

March 28, 2011

I am dusting off a classic test for risk intuition. If you remember the test from years past, it will be nice to reminisce. If not, take the test now to assess your intuition and look at risk in a new way.

Stress Testing: A Reminder from Fukushima

March 17, 2011

The eyes of the world are on Fukushima, Japan, where heroic technicians and military personnel struggle to prevent a nuclear armageddon. A massive earthquake spawned a devastating tsunami that knocked out a nuclear power plant’s cooling system. And here we are. This reminds us how low-probability high-impact events tend to be correlated. If a country experiences prolonged draught, [...]

Upside Risk, Downside Risk

March 8, 2011

Risk has two components: exposure, and uncertainty. If either is absent, there is no risk. But some people insist there must be a third component: downside. Let me explain. If you are uncertain about some consequential event, the set of possible desirable outcomes is sometimes called your “upside risk”. The set of possible adverse outcomes is [...]

Peter Bernstein’s Evolving Thinking On Risk

May 12, 2007

Peter Bernstein is an elder statesman of finance. He served time in the rough-and-tumble world of portfolio management. He was the first editor of the Journal of Portfolio Management, and his diverse writings have made him somewhat the chronicler of twentieth century finance. He is best known for his book Capital Ideas: The Improbable Origins [...]

I’ll Be Gone. You’ll Be Gone.

January 19, 2007

In his new book Accidental Investment Banker, Jonathan Knee introduces us to the phrase IBG YBG, which means “I’ll be gone. You’ll be gone.” This might be whispered between investment bankers when an inconvenient fact comes to light during due diligence on a company they are about to float. “Don’t sweat it” is the implication. [...]

Milton Friedman: A Lesson in Positive Risk Measurement

November 24, 2006

I woke up in a London hotel last Friday, sleep deprived and just aching for some real American coffee. I nibbled my black pudding with fried tomatoes and glanced at the Financial Times. Milton Friedman had died. Friedman is best known for his advocacy of monetarism, a mistake that irrevocably associated him with the gyrating [...]

A Motivational Thought

November 2, 2006

So often, procedures read like some sort of legal disclaimer. Write them as you would a best-selling cookbook. They should not tell people what they can and can’t do. They should tell people how to do things.

The Trend is Your Friend: Value-at-Risk and Amaranth

October 26, 2006

This week, Jeff Skilling received a well-deserved sentence of 24 years for his creativity at Enron. I wouldn’t take the sentence too seriously. Remember that Mike Milken—the Junk Bond King of the 1980s—was sentenced to ten years. After two years, he was diagnosed with terminal cancer, petitioned for early release, received early release, and then [...]

A Right Way and a Wrong Way

October 19, 2006

Not long ago, I was sitting on a trading floor, helping a trader figure out the intricacies of volatility surfaces. The firm’s head of risk management strolled by, and the trader grunted an expletive under his breath. I was taken aback by the trader’s vehemence. Not only did he dislike the head of risk management, [...]

Inaugural Article

October 12, 2006

Ask a practitioner of the origins of financial risk management, and he might say it emerged in response to financial blow-ups of the early 1990s. Or he might say it emerged out of efforts by the Basel Committee to standardize bank capital requirements globally. Or he might say it emerged from efforts by banks to [...]