tag:blogger.com,1999:blog-8624873013842943245.post4059407807071038047..comments2012-07-13T18:32:57.485-07:00Comments on The Cranky Critter: Open Thread: Risk AversionCranky Critterhttp://www.blogger.com/profile/05509666202091121125noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-8624873013842943245.post-83468715957748130932010-10-22T12:14:05.977-07:002010-10-22T12:14:05.977-07:00If you minimize or manage it, you are by definitio...If you minimize or manage it, you are by definition avoiding some of it. Naturally, it is impossible (and IMHO undesirabel) to avoid ALL risk. <br /><br /><i>We have a risk management department where I work, and some of us in engineering refer to them as the risk avoidance department because of the silly things they want to expend limited resources on, while ignoring the bigger picture. It's a thing of my own little world. </i><br /><br />Not really. My point has more to do with big picture and overall assessment of multiple risk factors. And could even in spirit lead back to Niebuhr's Serenity Prayer ... I was probing for explication, got it, and I grok entirely. :-)Tullyhttps://www.blogger.com/profile/03842067230152580405noreply@blogger.comtag:blogger.com,1999:blog-8624873013842943245.post-19279035174813023432010-10-22T10:33:21.551-07:002010-10-22T10:33:21.551-07:00Risk avoidance isn't an exercise in futility u...<i>Risk avoidance isn't an exercise in futility unless one doesn't actually (and realistically) assess the cost/benefit of one's avoidance tactics and compare them to the accompanying risk generated by the avoidance activity.</i><br /><br />I'm definitely putting my own take on the term. The reason I think risk avoidance is futile is because you can't really avoid risk (to be hyper-literal about what might just be a term of art or sorts). You can only minimize or manage it.<br /><br />We have a risk management department where I work, and some of us in engineering refer to them as the risk avoidance department because of the silly things they want to expend limited resources on, while ignoring the bigger picture. It's a thing of my own little world.hairshirthedonisthttps://www.blogger.com/profile/02714794284069055508noreply@blogger.comtag:blogger.com,1999:blog-8624873013842943245.post-77436995269494834972010-10-22T06:41:13.339-07:002010-10-22T06:41:13.339-07:00Plowing through that article now.
The beginnings...Plowing through that article now.<br /><br /> The beginnings of it reminded me of a naive question that I keep wondering about, one that I'd like you guys to speak to... .<br /><br />So bear with me while I sort of set it up. I begin by thinking about how subprime lending fueled a real estate bubble that collapsed. The bubble collapsed because it had to do so eventually, as prices outstripped what buyers could afford to pay. <br /><br />Then I notice that the bubble-inflating subprime lending was fueled by the ability of loan originators to package and sell their loans to other people, thereby offloading their risk to other people. [That offloading came along with, of course, some sort of story by the originators about how much risk was involved, a story which people further along the chain bought into. As we know now, that story was wrong.] The ability of originators to offload all of their risk removed any incentive to accurately assess borrower creditworthiness and loan viability.<br /><br />Which brings me to my naive question. Shouldn't we try to revise the system to insist that loan originators of all sorts must retain some substantial portion of the risk they create by originating the loan?Cranky Critterhttps://www.blogger.com/profile/05509666202091121125noreply@blogger.comtag:blogger.com,1999:blog-8624873013842943245.post-22532836333690080772010-10-22T05:27:41.011-07:002010-10-22T05:27:41.011-07:00I think of risk avoidance as an exercise in futili...<i>I think of risk avoidance as an exercise in futility that causes people to focus too heavily on the most apparent risk at the expense of other more diffuse but very real risks, resulting in a failure of good risk management</i><br /><br />Risk avoidance isn't an exercise in futility unless one doesn't actually (and realistically) assess the cost/benefit of one's avoidance tactics and compare them to the accompanying risk generated by the avoidance activity.<br /><br />Related principle often seen in econ involves economic impact estimates for publicly-funded project proposals, where the proponents invariably overstate the potential positive impacts while failing to even mention the (more certain) negative impacts. <br /><br />Like the linkage there. Another great example of a lovely theory brought down by an ugly reality.Tullyhttps://www.blogger.com/profile/03842067230152580405noreply@blogger.comtag:blogger.com,1999:blog-8624873013842943245.post-44873867247137095352010-10-21T11:41:34.057-07:002010-10-21T11:41:34.057-07:00I started to write a comment about the use of the ...I started to write a comment about the use of the phrase "risk aversion," but realized that what I was really thinking of was "risk avoidance." I think of risk avoidance as an exercise in futility that causes people to focus too heavily on the most apparent risk at the expense of other more diffuse but very real risks, resulting in a failure of good risk management. Risk aversion is fine.<br /><br /><a href="http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all" rel="nofollow">Here's</a> an article from a year and half ago titled "Recipe for Disaster: The Formula That Killed Wall Street." It gets at some of the reasons for the risk-taking that let to the latest financial crisis. It's a good read if you haven't read it already, and maybe if you have, but it's been a while.hairshirthedonisthttps://www.blogger.com/profile/02714794284069055508noreply@blogger.comtag:blogger.com,1999:blog-8624873013842943245.post-76535019533605292032010-10-20T21:38:40.245-07:002010-10-20T21:38:40.245-07:00(Amusingly enough, my CAPTCHA for that was "r...(Amusingly enough, my CAPTCHA for that was "reist.")Tullyhttps://www.blogger.com/profile/03842067230152580405noreply@blogger.comtag:blogger.com,1999:blog-8624873013842943245.post-69144403712696648192010-10-20T21:37:20.860-07:002010-10-20T21:37:20.860-07:00TANSTAAFL!TANSTAAFL!Tullyhttps://www.blogger.com/profile/03842067230152580405noreply@blogger.com