Let’s start by scoping risk before we even bother defining risk. Does risk only relate to losing (ie, downward) something or someone (sic!), or does it also include missing out on an upward potential? This explains my blog title’s dilemma: if we don’t understand something, are we able to calculate it?
Our usual solution lies in slicing the elephant (ie, the aggregate risk) into portions (eg, credit, liquidity, market, operational). Then we believe that we can calculate risk although we do recognise that some of these calculations are more like witchcraft. Nevertheless, these calculations are only about losing money.
Interestingly, a private person would never even be interested in calculating her/his risk. There are too many risks, too many probabilities. Hence, the risk matrix would be incomprehensible. Most of all, risk is not always about money. How do you calculate the risk of losing someone (eg, children, employee, parents, romantic partner)?
I have spent some five years at the risk department of a bank. In 2006, I asked “stupid” questions, which subsequently appeared less stupid than bankers had assumed. I still remember one of these: what is the funding risk of a bank? Ultimately, a bank is a “trading” company that ”buys” and “sells” money.
During my stay at that bank, I clearly noticed the silo approach towards risk management. How do you calculate enterprise risk management: do you add or multiply silo risks?? Silos may look independent but a single fire and a subsequent explosion may destroy everything.
The problem with risk is that the how, who, what, when and where are all uncertain. Only the Why is never uncertain: it’s a part of Life itself. While it’s rather easy to calculate with constants, lots of variables result in a (very) difficult calculation. Frankly, the notion we can calculate and control risk seems absurd.
Each day, I’m taking calculated risks but the idea of calculating these risks has never ever crossed my mind.
Calculated Risk (2020) by Estère
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Note: all markings (bold, italic, underlining) by LO unless stated otherwise.
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