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The Book of Risk
Author(s): Dan Borge (Author)
- Publisher: John Wiley & Sons
- Publication Date: 9 May 2001
- Edition: First Edition
- Language: English
- Print length: 256 pages
- ISBN-10: 0471323780
- ISBN-13: 9780471323785
Book Description
In this exceptionally lucid, accessible book, one of the most highly regarded industry experts illuminates the delicate process of making decisions in an uncertain world and helps both lay people and professional risk managers understand the role of “risk-management” in their work, their lives, and their businesses. This book will enable professional risk managers to truly grasp the concepts behind their tools, and it will enable their clients (investors) and their coworkers to understand them as well. Handy and easy-to-read, The Book of Risk provides a down-to-earth look at an exciting field that has practical applications for everyone.
Dan Borge, PhD (Clinton Corners, NY), was managing director and partner at Bankers Trust Company. He was with Bankers Trust for the last twenty years and was the architect of the first-ever risk management system implemented institutionally–Bankers Trust’s renowned RAROC system. Prior to working at Bankers Trust, he designed airplanes at Boeing. He is an aeronautical engineer and has a PhD in finance from Harvard Business School.
Editorial Reviews
Review
From the Inside Flap
Written by one of the most highly regarded experts in the field, The Book of Risk is an exceptionally clear, thoroughly entertaining introduction to contemporary risk management. Dan Borge illuminates the delicate process of making decisions in an uncertain world from a professional risk manager’s point of view. Writing with verve and good humor, he breaks the concepts and applications of risk management down into plain English. He describes the techniques professional risk managers use for determining probabilities and ferreting out personal preferences, and then combines them in a way that helps you to take more effective action, increase your chances of positive outcomes, and recognize and seize further financial opportunities. And, most importantly, Dan Borge shows you where in your life-personal or professional-you already act as a “risk manager” and how to adapt risk management methods for achieving your goals and shaping your destiny.
Face it, life is all about change, and the future is always uncertain. Each one of us, in our own way, expends a considerable portion of his or her mental energies each day sizing up odds, weighing risks and benefits, and attempting to avoid negative outcomes. As Dan Borge explains in his lucid, down-to-earth style, you should read this important book “not to become a risk manager, but to become a better risk manager, since we are all risk managers already.”
From the Back Cover
“Failure to read and to heed Borge on risk is an unacceptable risk.”-Charles S. Sanford, Retired Chairman of the Board and CEO, Bankers Trust New York Corporation and Bankers Trust Company
“The essential concepts of risk set forth in clear language and an engaging manner. Dan Borge demonstrates the use of tools for decision making in uncertainty with intuitive examples and broad application.”-Clinton Lively, Managing Director, Corporate Risk Management, Merrill Lynch
“Would you like a systematic way to make decisions whose risky outcomes can damage your well-being? Have you been out of school long enough so that you want the answers and not the theories? The Book of Risk brings the scientific tools of risk management to intelligent investors using Strunk and White’s crisp and clear writing style.”-Professor Alan C. Hess, School of Business, University of Washington
“Dan Borge’s The Book of Risk provides clear insights and tools to help readers make decisions that shift the odds in their favor. The biggest risk is not reading it.”-Peter D. Moore, Founder and CEO, Human Capital Forum
“Combining technical integrity with common sense, Dan Borge has taken the arcane topic of risk management and transformed it into a lively, mainstream way of thinking about how we make choices every day-in financial markets, in life sciences, in simply choosing to cross a busy road when we’re in a hurry. Quite simply the best introduction to risk management yet written.”-John Herron Jr., Former Senior Managing Director and Head of BT Ventures, Bankers Trust Company Consultant, and Managing Partner of Elm Tree, LLC
“Dan Borge builds the concepts of risk management in a very readable and interesting manner. Readers who watch the house being built will be better equipped to manage risks in both their professional and personal life.”-Dwight B. Crane, George F. Baker Jr. Professor of Business Administration, Harvard Business School
About the Author
Excerpt. © Reprinted by permission. All rights reserved.
WHAT IS RISK MANAGEMENT
AND WHY SHOULD YOU CARE?
(Please note: Figures and any other illustrations mentioned in the following text refer to the print edition of this work, and are not reproduced here.)
The term “risk management” is loaded with connotations of caution and timidity, carrying unpleasant reminders of dreary sessions with insurance agents and infuriating lectures from parents on the dangers of having a good time. People who think about risk management at all are likely to think of it as a grim necessity, at best.
From another perspective, however, risk management is absolutely riveting, for it is a way to gain more power over events that can change your life. Risk management can help you to seize opportunity, not just to avoid danger. Since good risk management can mean the difference between wealth and poverty, success and failure, life and death, it is worth some of your attention.
Risk management is now emerging as a profession in its own right. People who might have become lawyers, doctors, or engineers are now becoming risk managers, and the best of them are being handsomely rewarded for doing so. Risk managers are starting to make regular appearances at board meetings of major corporations and financial institutions. There are professional risk management journals and there are risk management conventions in Florida. The existence of risk management professionals is, on balance, a good thing, but you should not think that the arrival of the experts lets you off the hook. The experts can help you, but you cannot escape the responsibility of being the chief risk manager of your own life. Only you know what you really want and what you actually believe. You will be the one to suffer most from bad decisions made on your behalf.
The advent of risk management as a distinct profession has created a babble of obscure jargon that can confuse and frustrate the uninitiated. As usual, the experts want to discourage their paying customers from doing too much for themselves. One of the ways they do this is to give unfamiliar names to commonsense ideas, like a doctor telling you that you have a perorbital hematoma when all you have is a black eye.
Fortunately, the basic ideas of risk management are really very simple:
Risk means being exposed to the possibility of a bad outcome.
Risk management means taking deliberate action to shift the odds in your favor–increasing the odds of good outcomes and reducing the odds of bad outcomes.
The art of risk management is to adapt and apply these ideas to the particular situations you face in real life–whether you are making decisions in your profession or in your personal life.
The point is not to become a risk manager but to become a better risk manager, since we are all risk managers already. We make risk decisions every day, often without thinking about it. If you got out of bed this morning, you made a risk decision. If you lit up a cigarette, you made another. If you drove your car to work, you made another. If you put some money in the stock market, you made another. If you took a plane to Philadelphia, you made another (or perhaps two).
I am not suggesting that you agonize over every little choice you make, but I am suggesting that you can and should think more carefully about those decisions that could have important consequences for you. Without realizing it, you might be taking unnecessary or excessive risks. You might be too timid about taking reasonable risks that offer big rewards. You might not be aware of some of the choices available to you that risk management makes possible.
The possible applications of risk management are endless. The financial world is now a hotbed of risk management activity because financial institutions have been particularly vulnerable to surprising disasters, many of which could have been prevented by better risk management. Financial risks have also been easier to quantify than some other kinds of risks. The better-managed financial institutions can now estimate their risk exposure to changes in the financial markets every day.
Beyond finance, risk management in one form or another is being applied in medicine, engineering, meteorology, seismology, and many other fields where the consequences of uncertain events can be extreme. The Food and Drug Administration weighs the frequency and severity of a drug’s side effects against the drug’s effectiveness in fighting disease. Insurance companies price their coverage by estimating the odds and possible damage of a category five hurricane hitting Miami and of a Richter 8 earthquake hitting Los Angeles.
These kinds of calculations are becoming more relevant and more useful as the field of risk management advances, but risk management is not, and will never be, a magic formula that will always give you the right answer. It is a way of thinking that will give you better answers to better questions and by doing so helps you to shift the odds in your favor as you play the game of life.
THE FUTURE IS UNCERTAIN, BUT NOT UNIMAGINABLE
The purpose of risk management is to improve the future, not to explain the past. This will seem obvious to everyone but risk management experts, who can become obsessed with fitting historical data to analytically convenient theoretical models, ignoring the possibility that the conditions that caused the historical events to occur will not apply in the future. The main problem with the future, of course, is that no one knows exactly what it will be. Life is uncertain.
People respond in different ways to the prospect of a life full of surprises. Fatalists adopt the attitude that what will be will be–and simply react to events as they unfold. They go with the flow. Fanatics deny uncertainty by believing passionately in their preferred vision of the future, ignoring all other possibilities..
