Snappy Comeback to the Latest Criticism of VaR

Last week, the Swiss pulled their peg, and swissie soared. Part of the fallout—surprise, surprise!—is criticisms of value-at-risk. This time The Economist is leading the charge, writing: … Another likely casualty is the ‘value-at-risk’ models banks use to calculate the maximum they might lose on any given investment or transaction. But banks’ value-at-risk models don’t measure the “maximum they might lose”. They measure the maximum … Continue reading Snappy Comeback to the Latest Criticism of VaR

A Revelation

I have written about it before, and I am sure I will write about it again. … how financial risks that devastate firms aren’t random occurrences, as if the gods on Olympus toss dice to determine a company’s fate. No. There are causes. And these are usually traceable to human frailties. Most often, the specific human frailty is hubris. Think Orange County, Enron, Bernie Madoff … Continue reading A Revelation

What’s Your Risk Appetite?

Suppose you arrive at your dentist’s office for an appointment. Before escorting you to an examination room, the receptionist asks what your pain appetite is. That afternoon, you head over to the Apple store to buy the latest iPhone. A sales clerk at the front door points you to the line stretching around the block and asks what your wait-time appetite is. That evening, you … Continue reading What’s Your Risk Appetite?

Fooled By Black Swans

Imagine you are presenting to the board about risk management. The presentation is going well, and you are about to finish up when a board member stirs. He hasn’t said a word the entire meeting, so this is his chance to look smart. He asks “What are you guys doing about black swan risk?” What a way to ruin your day! The concept of black … Continue reading Fooled By Black Swans

What The 4 T’s Overlook

If you have been active in risk management for a while, you have probably heard of the 4 T ‘s. These—at a very high level—are the four possible responses to risk. Conveniently, each begins with the letter T: Tolerate Treat Transfer Terminate They appear in various risk management standards. They pop up in books, articles and web searches. Would you believe they are incomplete? They … Continue reading What The 4 T’s Overlook

Upside Risk, Downside Risk

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 then your “downside risk”. For example, if you will either … Continue reading Upside Risk, Downside Risk

Conflict Over Risk Management: A Case Study

Conflict is a recurring problem for financial risk management. At your own firm, are risk managers dismissed as “risk police”? Are risk committee meetings contentious? Do traders hoard information? If you answered “yes” to some of these, you may have a serious problem. I just returned from London where I conducted a two-day strategic planning retreat for a client. They are a private wholesale firm … Continue reading Conflict Over Risk Management: A Case Study

I’ll Be Gone. You’ll Be Gone.

In his new book The 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. Investors may be burned. The investment bank itself may … Continue reading I’ll Be Gone. You’ll Be Gone.