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

3.6 Managing the Unanticipated

The ultimate goal for risk management is to build a robust yet flexible organization and set of processes. We need to recognize that quantitative risk measurement tools often fail to capture just those unanticipated events that pose the most risk to an organization. The art of risk management is in building a culture and organization that can respond to and withstand these unanticipated events.

Managing risk for crises, tail events, or disasters requires combining all types of risk—market risk, credit risk, operational risk, liquidity risk, and others. Generally, crises or disasters result from the confluence of multiple events and causes. Examples are the collapse of Barings in 1995 (and also the same firm's collapse in 1890) and the Société Générale trading loss in January 2008.

Risk management is about managing all types of risk together—building a flexible and robust process and organization. The organization must have the flexibility to identify and respond to risks that were not important or recognized in the past and the robustness to withstand unforeseen circumstances. Importantly, it also must incorporate the ability to capitalize on new opportunities.

Examining risk and risk management in other arenas can provide useful insights and comparisons: insight into the difference between measuring and managing risk and comparison with methods for managing risk. Consider the risks in ski mountaineering or backcountry skiing, of which there are many. ...