Frankly, nothing new here but the telling — in this past Sunday’s New York Times Magazine Joe Nocera tells a fascinating story of the self-inflicted blindness of risk management approaches by the investment banking community.
Three observations from this article:
1 — When the chance of a catostrophic risk within your planning horizon is less than 1%, do you need a longer planning horizon?
2 — If everyone in your industry is using the same risk model, doesn’t it mean that everyone is susceptible to the same unforeseen risk?
3 — Do you really want a risk model that pushes the worst risks to face your business to less than 1%?
It seems the investment bankers were not managing risks at all. Instead they were taking courses of action that supposedly led to low risks with high gains. I’d suggest that life’s experience tells us there is no such thing.
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