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Collection of Risk Management One-Liners

  • Fix the roof while the sun is shining
  • Trust but verify
  • Follow the money
  • It is the leverage, stupid
  • When the tide goes out you find who's been swimming naked
  • There is a sucker born every minute
  • If you do not know who the patsy is - you are the patsy
  • Asking the question is the hardest step
  • There is never only one cockroach
  • Lies, damned lies, and statistics
  • Prediction is very difficult, especially about the future
  • That will never happen, because I have never seen it occur in my lifetime (h\t @scottnorth1)
  • God is in the details. The Devil is in the details too
  • If it's too good to be true, it usually is
  • Fear the Greeks, even when they bring gifts
  • Don't fall in love with your risk models
  • The problem with experts is that they do not know what they do not know
  • The biggest risk is not taking one
  • Any fool can make a complex model, simplicity the key to brilliance

More risk management wisdom

  • Identifying, quantifying and managing complexity is one of the least developed areas in financial riskmanagement
  • In the financial universe there are no isolated systems: personal, corporate and country risks interlinked in a correlation web
  • The web of financial contracts and interdependencies is complicated but finite. in due course it can be understood and tamed
  • Financial risk model complexity and quality are not necessarily correlated. But complexity is also in the eye of the beholder
  • Applying quantitative models to financial phenomena is subject to severe misspecification, whether intentional or unintentional
  • After the simplest binary, risk on / off choice, next step up in risk management complexity is the traffic light system: green, orange, red
  • Reputation in banking is not optional but a license to operate. Reputation risk introduces a zero tolerance approach
  • When there is no empirical basis to support risk assessment the fallback is polling expert opinion. Human experts will use analogy
  • When you set a limit on trading you create anchoring bias. Read kahneman
  • Controlling dynamically the amount of risk exposure by setting and updating risk limits is a standard tool for risk management
  • First recorded incident of bank risk concentration: Florentine banks' Bardi and Peruzzi sovereign exposure to King Edward III
  • Regulation is supposed to prevent financial crises. the track record seems not good but we don't really know a world without it
  • Financial crises are recurring economic phenomena where prevailing contractual arrangements / designs get severely challenged
  • Scenario analysis is a basic building block for a probabilistic approach to risk
  • Diversification versus model risk are the two key phenomena relevant for managing portfolio risks
  • In a crisis, all correlations go to one. Except this phenomenon concerns market expectations and prices and actual events might be less correlated
  • Risk insurance can remove risk but does create new risks (exposure to the insurance provider and other residual risks)
  • There is risk and there is the perception of risk. The two are only loosely correlated and perception is generally more volatile
  • One of the simplest and most effective forms of risk management is risk avoidance (also termed zero risk appetite)
  • Operational risks definitely scale with the size and complexity of the organization but the precise law is not easy to establish
  • Some risks can be usefully decomposed into a probability of occurrence and a severity of occurrence. Others have a continuous range
  • Risk is about the deviation /uncertainty around expectation. A bad outcome expectation with little remaining uncertainty is not risky
  • There is no physical law to prevent even the deepest, most active, market to become illiquid
  • Risk is not linear. Robust ratings need log-scale: 10%, 1%, 0.1% hence limited in number. Alphabet soup not a good risk metaphor
  • Credit risk analysis looks at the 1) ability and 2) willingness of an entity to fulfill its contracts. It gets messier very fast
  • All risk models built on past experience. some may contain an element of truth about the future
  • All forms of financial risk are subordinate to sovereign risk

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