66 lines
1.7 KiB
Markdown
66 lines
1.7 KiB
Markdown
---
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id: the-failure-of-risk-management
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aliases: []
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tags: []
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---
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# *The Failure of Risk Management*
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The Failure of Risk Management
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(Why It's Broken and How to Fix It)
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by Douglas W. Hubbard
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## Key Takeaways
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### Qualitative Metrics Must Be Avoided
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Qualitative risk analysis
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(i.e. risk matrices, scoring charts)
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departs from legitimate statistical methodology
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and has no robust evidence to suggest its efficacy.
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There is good reason to believe that such methods
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are deleterious to their intended purpose
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in contradiction to the common response
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that they are "better than nothing".
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### Utility as a Measure of Value
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Expected Value (Probability × Magnitude)
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alone can not predict or inform risky decisions,
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except for risk-neutral parties.
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People and organizations are risk-averse
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...
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* [ ] Finish this paragraph. (see chapter 6) ➕ 2025-07-04
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### Expert Opinion Must Be ~~Adjusted~~
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Expert opinion is valuable despite its flaws.
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...
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The book details the statistically observable tendency for people
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to underestimate risk and to be overconfident in their beliefs.
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It describes the process of "calibration"
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by which people can be trained to compensate for this bias
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and make predictions far more accurately.
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Experts tend to be good at creating heuristics,
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but do not apply them consistently in practice.
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> [!example]
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> Chapter 7 describes a study where experts
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> were shown to estimate risk differently for identical cases.
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## Mentioned Topics and Abbreviations
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* Analytic Hierarchy Process (AHP)
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* Multi-Attribute Utility Theory (MAUT)
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* Actuarial Science
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* Options Theory (OT)
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* Modern Portfolio Theory (MPT)
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* Probabalistic Risk Analysis (PRA)
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* Value at Risk (VaR)
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* Loss-Exceedance Curve (LEC)
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* Risk Tolerance
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