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Professor Philip Linsley The University of York
A short history of risk Professor Philip Linsley The University of York
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A discussion of the history of risk over time
From a company perspective From the perspective of society
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Is risk important?
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Is risk important? Examples: Hospitals - patient safety
Engineers – bridges, buildings, transport
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In finance? Examples of losses made by individual bank traders
Nick Leeson (Barings Bank 1995) $2bn Jerome Kerviel (Societe Generale 2008) $7bn Howie Hubler (Morgan Stanley) $9bn
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Banks at the forefront of risk management practices
Bank risk Market risk Risk of adverse price movements Credit risk Risk of loan not being repaid ……….
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The rise of a risk management industry since 1980s
Consulting Professional risk management organizations Changes in language
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700 years ago Risks were considered unpredictable hazards or natural disasters Caused by god or demons Incalculable For example, floods, earthquakes …..
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From God to measurement
Cardani (1663) provides first systematic treatment of probability Leads to the development of statistics Leads (eventually) to insurance (fire, life, property, ….)
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Companies and risk 1950s to 1980s Insurance Controlling risk
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Remember: MARKET RISK Risk of adverse price movements
A trader buys something at a price of €100 but they do not know if they will sell it at a higher or lower price For example, banks might trade currencies
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Companies and risk Late 1980s and early 1990s
VaR (value at risk) developed by J P Morgan “Our bank is 99% certain that we will lose no more than $20m on our portfolio over the next 10 days” Risk has a positive side Risk appetite
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Companies and risk Mid to late 1990s
ERM (Enterprise wide risk management) Nick Leeson and Barings Bank 1995 Operational risk “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”
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Companies and risk Early 2000s Risk and financial reporting
Enron bankruptcy 2001 Parmalat 2003 Sarbanes-Oxley Act 2002 Non-financial companies appoint Risk Officers Risk governance
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Companies and risk Mid 2000s to present Global financial crisis
Cost $10 trillion? Behaviours and calls for change in culture Risk culture
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But what about wider society?
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World Economic Forum
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Chernobyl – Ukraine –1986 Nuclear reactor overheats
100x more radiation than Hiroshima and Nagasaki bombs
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Industrial society Risks transparent (see, touch, smell, taste)
Risks become calculable Risks can be ‘managed’ through insurance Risks are limited to particular regions and limited in time too
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Now = Risk Society (Ulrich Beck, 1986)
Risks differ greatly: Environment, pollution, radioactivity, food, chemicals …. ‘Manufactured’ risks Risks cannot be limited: Space Time Socially Scale of risks is like never before: Hard to quantify Hard to prevent Hard to avoid For example, Chernobyl
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Some important approaches to risk
Based upon work by: Risk Society Ulrich Beck Cultural theory of risk Mary Douglas Governmentality Michel Foucault Psychometric Paul Slovic Risk is complex and any history of risk is only partial
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