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The Failure of Risk Management
The Failure of Risk Management (Why It's Broken and How to Fix It) by Douglas W. Hubbard
Key Takeaways
Qualitative Metrics Must Be Avoided
Qualitative risk analysis (i.e. risk matrices, scoring charts) departs from legitimate statistical methodology and has no robust evidence to suggest its efficacy. There is good reason to believe that such methods are deleterious to their intended purpose in contradiction to the common response that they are "better than nothing".
Utility as a Measure of Value
Expected Value (Probability × Magnitude) alone can not predict or inform risky decisions, except for risk-neutral parties. People and organizations are risk-averse ...
- Finish this paragraph. (see chapter 6) ➕ 2025-07-04
Expert Opinion Must Be Adjusted
Expert opinion is valuable despite its flaws. ...
The book details the statistically observable tendency for people to underestimate risk and to be overconfident in their beliefs. It describes the process of "calibration" by which people can be trained to compensate for this bias and make predictions far more accurately.
Mentioned Topics and Abbreviations
- Analytic Hierarchy Process (AHP)
- Multi-Attribute Utility Theory (MAUT)
- Actuarial Science
- Options Theory (OT)
- Modern Portfolio Theory (MPT)
- Probabalistic Risk Analysis (PRA)
- Value at Risk (VaR)
- Loss-Exceedance Curve (LEC)
- Risk Tolerance