Readings: Boning Up on the New Views of Risk

Recent events on Wall Street and in other sectors of the economy have reminded board directors that they can never know too much about risk. We will make a risk-free bet that most will admit they need to know more, even lots more, and are currently looking to advance their knowledge. To scratch that itch, we recommend two books that are, in terms of payoff, unlike most investments. They are sure things.

The Black Swan: The Impact of the Highly Improbable

One day, your black swan will surely come in. That’s the bad news.

The book’s title is visual onomatopoeia, a phrase that resembles the thing it describes. The title’s metaphorical meaning is a reference to very rare occurrences, the kinds which cause intelligent people to seek ways to reassure themselves about events that worked out, shall we say, unhelpfully. The “black swan” syndrome that Nassim Nicholas Taleb describes is when intelligent people, faced with a world-class economic or geopolitical hangover after a really enjoyable evening, reverse engineer all of the parts of the story so it becomes neat, concrete, and predictable. Nice as well if you end up with a scapegoat, and even better if that scapegoat is a CEO or a president. In other words, make it make sense. Please.

Taleb is part proprietary trader, part philosopher, part social critic, and certainly, part world-weary cynic. His book is a provocative look into behavioral science and human nature. As business is again being visited by capricious gods, this time of the credit-market variety, the book makes for core board-director reading, and for some of you may be fully deductible.

The Black Swan blends together a careful and logical world view that suggests theory be weighed against empirical evidence, particularly when the experts claim to have eliminated that great leveler, volatility. Taleb believes the greatest risk is when we have hedged all risk. Once you finish reading this book, try to avoid the tempting tendency to call every calamity a Black Swan, although it may greatly delight your guests at cocktail parties.

'Wit and Erudition' in Risk Telling 

As strategic planning was to the 1980s, so risk management will be to this decade—no longer a quantitative backwater for nerds whose aspiration is to serve in internal audit departments. Managing risk is now “Everyone’s Job #1” —the new “it” career.

Proper risk management, to paraphrase Ryan O’Neill in Love Story, means never having to say you’re sorry. That would seem a worthy ambition. However, the thought that everyone is on the same risk-management page can be scary: Once we all begin to take it seriously at the same time, we end up in a maelstrom of correlation. If all risk is managed identically, it’s like placing a bet on both sides of an outcome, and ultimately, making a bet against yourself; so no one wins.

Peter Bernstein’s book also raises the question of whether governments or markets, with their invisible hands, should be the gating factors on who takes on how much risk and when.

Against the Gods blends together a masterful telling of history, philosophy, and wisdom as regards this ineffable thing called risk. He brings the story of risk alive—most risks fortunately start out that way—with wit and erudition about which we cannot know enough.