10 - Investors' responsibility in risk management

Abstract

Risk management has two sides. One is quantitative, based on data and models, and the other is qualitative. Mastery of the qualitative part requires a fruitful dialogue with different stakeholders in and constituents of the investment arena to help develop a better understanding of the holistic aspects of risk management: its goals, tools, and shortcomings. These two sides, qualitative and quantitative, are linked together through a methodology that integrates them and drives the risk manager's hand. An important part of this methodology is a questioning attitude which challenges the “obvious.” There is an information risk confronting investors and a model risk. Information risk frequently is accentuated because of a hidden leverage risk whose magnitude becomes known only at the time of bankruptcy. Investments also have legal risk, some of which is predictable while another, often the larger part, is unexpected. Starting with the most basics of all notions, the risk an investor is taking can be best expressed as the future cost. At the bottom line, this risk creates claims on income and it does so in a manner that might be seen similar to interest expense and overhead. Because risk claims are prospective and contingent, cash-equivalent costs do not initially appear on the books.