Chapter 6
Risk Decision Making
Often the difference between a successful person and a failure is not one has better abilities or ideas, but the courage that one has to bet on one's ideas, to take a calculated risk—and to act.
André Malraux
During the break at an ERM roundtable discussion of chief financial officers and chief risk officers of leading U.S. companies implementing ERM programs, I overheard the following exchange between a few of the attendees: “Are you making different decisions based on your ERM information? Are you doing anything differently because of ERM?” Unfortunately, as discussed earlier, most ERM programs suffer from an inability to integrate ERM into decision making. Yet, this should be the most important step in the ERM process. If you are not acting differently, making different choices, as a result of implementing an ERM program, then you have misspent a good deal of time and energy. As described in Chapter 3, the value-based ERM approach resolves these issues, allowing a full integration of ERM into decision making.
There are two major categories of risk decision making that we will discuss:
1. Defining risk appetite and risk limits
2. Integrating ERM into decision making
Defining Risk Appetite and Risk Limits
We will discuss each of the following two topics separately:
1. Defining risk appetite (risk exposure thresholds at the enterprise level)
2. Defining risk limits (risk exposure thresholds below enterprise level)
Defining Risk Appetite
Defining ...
