Tag: risk appetite

National Entrepreneur Day

Nassim Taleb: ‘The Black Swan’ author in praise of the risk-takers

The writer and former options trader Nassim Taleb talks to Margareta Pagano about banking, Babylon and birdsong

By The Independent

Nassim Nicholas Taleb has a dream. It’s this: he wants us to celebrate the restaurant owners, the taxi drivers, the market traders and carpenters and all the other risk-takers who put their skin in the game and who drive the economy for the rest of us.

“Let’s call it a National Entrepreneur Day,” declares the author of the best-selling The Black Swan, and have a day devoted to entrepreneurs, because they are the heroes who at times take suicidal risks for the mere survival of the economy: “Optionality makes things work and grow – the UK and the US have a fantastic history in risk-taking, in trial and error, without shame in failing and starting again. We need to recover that spirit.” Read more >

Innovation Risk: How to Make Smarter Decisions

By Robert Carhart Merton for Harvard Business Review

New products and services are created to enable people to do tasks better than they previously could, or to do things that they couldn’t before. But innovations also carry risks. Just how risky an innovation proves to be depends in great measure on the choices people make in using it.

Ask yourself this: If you had to drive from Boston to New York in a snowstorm, would you feel safer in a car with four-wheel drive or two-wheel drive? Chances are, you’d choose four-wheel drive. But if you were to look at accident statistics, you’d find that the advent of four-wheel drive hasn’t done much to lower the rate of passenger accidents per passenger mile on snowy days. That might lead you to conclude that the innovation hasn’t made driving in the snow any safer.

Of course, what has happened is not that the innovation has failed to make us safer but that people have changed their driving habits because they feel safer. More people are venturing out in the snow than used to be the case, and they are probably driving less carefully as well. If you and everyone else were to drive to New York at the same speed and in the same numbers as you did before, four-wheel drive would indeed make you a lot safer. But if you and everyone else were to drive a lot faster, you’d face the same amount of risk you’ve always had in a snowstorm. In essence, you’re making a choice (consciously or unconsciously) between lowering your risk and improving your performance.

If the riskiness of an innovation depends on the choices people make, it follows that the more informed and conscious their choices are, the lower the risk will be. Read more >

Picture: Harvard Business Review ©

Testosterone to increase risk

Take too much Risk? Must be the testosterone…

By Maria Konnikova, Big Think Blog

When we think testosterone, we think macho. We think male, manly. We probably also think aggressive. And we think that with good reason. Men do traditionally have higher testosterone levels than do women, and higher testosterone has indeed been associated repeatedly with increased risk-taking behavior, especially in social domains (where aggression would fall). That’s also one of the reasons, runs the common wisdom, that on the whole, women tend to be more risk-averse than men.  But is this always the case?

Both too much and too little testosterone increase risk-taking and ambiguity tolerance

A recent study in Psychological Science examined risk preferences (as well as ambiguity preference) specifically within the economic domain, and found that the relationship between testosterone and risk preference is actually a U-shape: too much or too little, and your appetite for risk increases. And the relationship holds whether you’re male or female. Read more >

The risk management of nothing

Author: Michael Power, London School of Economics and Political Science
Source: Accounting, Organizations and Society 34 (2009) 849–855, Elsevier

This essay challenges core elements of enterprise risk management (ERM) and suggests that an impoverished conception of ‘risk appetite’ is part of the ‘intellectual failure’ at the heart of the financial crisis. Regulators, senior management and boards must understand risk appetite more as the consequence of a dynamic organizational process involving values as much as metrics.

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