Quantitative Risk Management: A Practical Guide to Financial Risk, + Website

1.2 Redefinition and Refocus for Risk Management

The focus on managing risk argues for a modesty of tools and a boldness of goals. Risk measurement tools can go only so far. They help one to understand current and past exposures, which is a valuable and necessary undertaking but clearly not sufficient for actually managing risk. In contrast, the goal of risk management should be to use the understanding provided by risk measurement to manage future risks. The goal of managing risk with incomplete information is daunting precisely because quantitative risk measurement tools often fail to capture unanticipated events that pose the greatest risk. Making decisions with incomplete information is part of almost any human endeavor. The art of risk management is not just in responding to anticipated events, but in building a culture and organization that can respond to risk and withstand unanticipated events. In other words, risk management is about building flexible and robust processes and organizations with the flexibility to identify and respond to risks that were not important or recognized in the past, the robustness to withstand unforeseen circumstances, and the ability to capitalize on new opportunities.

Possibly the best description of my view of risk management comes from a book not even concerned with financial risk management, the delightful Luck by the philosopher Nicholas Rescher (2001):

The bottom line is that while we cannot control luck [risk] through superstitious interventions, ...