Is risk an uncertainity or a probabilty ?

[Sandip Sen]

With crisis time in market and credit based risks, collapsing and propped up Banks,fluctuating market conditions, rising frauds and vanishing credit, plummeting GDP and employment, rising debt, and competative incremental pricing strateges, risk today is perhaps no longer an uncertainity but a distinct probabilty.

Project personnel in science and technology have been long used to this phenomenon, a reason why CERN and NASA puts up ambitious projects each year without flapping a eyelid. The failure to spot the Banking Crisis however doesn't make Risk management a Rocket science. We only need to modify Risk modelling techniques and start to manage Risk with day to day predictive analytics. See how variance based predictive analytics is used to manage Business and financial Risks a technique now widely used by Amazon and Google for market research:


Business Risk Management Series ( 954 views in 3 weeks )
http://tinyurl.com/lzokqy

Business Risk Case study Ba 31 ( 1185 views in 2 weeks)
http://bit.ly/LJofP

Business Risk Case study Ba 32 ( 385 views in 5 days )
http://tinyurl.com/lnkv9h

Case Studies to be continued on a regular basis.

[Rickson9]

One of the biggest risks is lack of knowledge when evaluating a financial instrument. When you minimize this risk you can minimize or eliminate the other forms of risk with your purchase price.

That's how my wife and I have approached it anyway.

[brad]

Uncertainty is an essential component of risk. If there were no uncertainty there would be no risk, because the outcome would be perfectly known. In practice, there are few investments that have zero risk because the future is always uncertain. There are some things we can predict, but the future is never completely knowable.

Knowing more about your investments can help reduce risk, but can never eliminate it. Predictive analytics cannot foresee all possible perturbations to the system, and I'm not sure the analogies with CERN and NASA are appropriate because in large part the risks of physics-based projects can be deduced from physical principles and logical analyses of the things that could go wrong. Markets do not operate by purely logical rules; human behavior and emotional reactions have enormous impacts on market behavior, and those are much harder to predict with any useful level of accuracy.

[FeeOnly.ca]

Originally Posted by brad

Uncertainty is an essential component of risk. If there were no uncertainty there would be no risk, because the outcome would be perfectly known. In practice, there are few investments that have zero risk because the future is always uncertain. There are some things we can predict, but the future is never completely knowable.

Knowing more about your investments can help reduce risk, but can never eliminate it. Predictive analytics cannot foresee all possible perturbations to the system, and I'm not sure the analogies with CERN and NASA are appropriate because in large part the risks of physics-based projects can be deduced from physical principles and logical analyses of the things that could go wrong. Markets do not operate by purely logical rules; human behavior and emotional reactions have enormous impacts on market behavior, and those are much harder to predict with any useful level of accuracy.

Great post above above.

The more I learn about this topic, the less I expect outcomes to fit the "normal distribution" pattern. Humans are animals, we do not act rationally much of the time. Any theory (investment or otherwise) based on the notion that individuals en mass routinely employ rational and emotion-free decision-making is well .. somewhat irrational.

http://www.yourwealthadvisor.ca/apps...es-the-economy


http://www.amazon.ca/Animal-Spirits-.../dp/0691142335


Often primitive and automatic response mechanisms in the brain go into action long before we are conscious of having made any decision.

Later we justify or rationalize that automatic response on a conscious level, but the actual decision was made below the level of consciousness, on a gut or instinctual level.

JM Keynes was first to refer to this as our "animal spirits". Understanding this notion won't remove the fat-tails from the distribution pattern of actual outcomes but it does help explain them. I also gives us a broader understanding the true nature of uncertainty as it relates to human behaviour.

[Sandip Sen]

It is true that knowledge is the best instrument to manage risk. Right knowledge helps track both opportunities and threats, but the problem is that it is not available uniformly to all. When we do predictive analytics, all we do is improve our responses based on knowledge of variations that are happening in the market place as well as operational variance.

[Sandip Sen]

Originally Posted by brad

Uncertainty is an essential component of risk. If there were no uncertainty there would be no risk, because the outcome would be perfectly known. In practice, there are few investments that have zero risk because the future is always uncertain. There are some things we can predict, but the future is never completely knowable.

Knowing more about your investments can help reduce risk, but can never eliminate it. Predictive analytics cannot foresee all possible perturbations to the system, and I'm not sure the analogies with CERN and NASA are appropriate because in large part the risks of physics-based projects can be deduced from physical principles and logical analyses of the things that could go wrong. Markets do not operate by purely logical rules; human behavior and emotional reactions have enormous impacts on market behavior, and those are much harder to predict with any useful level of accuracy.

Financial markets have been going boom and bust on a cyclic pattern since long.There is hardly any uncertainity in that, but rather a distinct probabilty that it will happen if the risk taking is not curbed. The fact that the symptoms were present since early 2006
( when AIG stopped dealing with CDS ) that the markets would collapse, shows that it was more a case of regulatory incompetancy than anything else. Market risks are based on prices, much simpler to predict than complex operational risks that CERN and NASA face, and the analysis of the pricing trends preceeding the credit crisis show that the it was nothing to do with the unknowable, but only that the whistleblower had clearly left the field. The Jim Saxton report to the US Congress in May 2008 quoted in my above presentations clearly identify the early fault lines that had started appearing since 2003.

[Sandip Sen]

Originally Posted by FeeOnly.ca

Great post above above.

The more I learn about this topic, the less I expect outcomes to fit the "normal distribution" pattern. Humans are animals, we do not act rationally much of the time. Any theory (investment or otherwise) based on the notion that individuals en mass routinely employ rational and emotion-free decision-making is well .. somewhat irrational.

http://www.yourwealthadvisor.ca/apps...es-the-economy


http://www.amazon.ca/Animal-Spirits-.../dp/0691142335


Often primitive and automatic response mechanisms in the brain go into action long before we are conscious of having made any decision.

Later we justify or rationalize that automatic response on a conscious level, but the actual decision was made below the level of consciousness, on a gut or instinctual level.

JM Keynes was first to refer to this as our "animal spirits". Understanding this notion won't remove the fat-tails from the distribution pattern of actual outcomes but it does help explain them. I also gives us a broader understanding the true nature of uncertainty as it relates to human behaviour.

True humans are animals...but where was the regulator?

[brad]

Originally Posted by Sandip Sen

The Jim Saxton report to the US Congress in May 2008 quoted in my above presentations clearly identify the early fault lines that had started appearing since 2003.

All of this stuff is easy to spot in hindsight. What's hard is predicting the future with a useful degree of certainty.

Originally Posted by Sandip Sen

Market risks are based on prices, much simpler to predict than complex operational risks that CERN and NASA face

If it were simple to predict prices and the ensuing market risks accurately, wouldn't we all be millionaires?