Showing posts with label knowledge. Show all posts
Showing posts with label knowledge. Show all posts

Dec 12, 2012

What's your Risk Intelligence Quotient?

One of the main problems in risk management is that we (oblivious) overestimate our risk knowledge.

If for example financial institutional boards have to define a risk-return strategy, they may overestimate the probability that the historic return level of a certain asset class will also be the expected future return level.
Or they might simply overestimate the quality of their investment advisor.... ;-)

To define an optimal asset mix on basis of a risk-return strategy, it takes more than just estimating future returns and/or risks of certain asset classes.

To make these kind of high-impact decisions it's important to train board members on knowledge of economic schools and theories and also on the relationship between economic developments and financial parameters like unemployment, inflation, GDP-growth, specific asset class return and risk parameters, linear and non-linear effects, and so on......

But more than that, it's important that board members - as they have learned all this - become aware of the fact that the more they know about risk and uncertainty, the more they'll realize that the outcome or certainty of a future development is intrinsically highly unsure. This last recognition will have significant consequences for the final choice with regard to the optimal asset mix given the risk appetite.

Risk Intelligence Test 
Eventually it all comes down to
Kowing how much you know
as Dylan Evans, author of the book "Risk Intelligence"states in the Dylan Ratigan Show

According to Dylan : 'Risk intelligence is not about solving probability puzzles; it is about how to make decisions when your knowledge is uncertain.'

Dylan Evans developed a short (5 min) Risk Intelligence Test.
See, if you can pas the test as an actuary or risk manager...
You can take the test here.
The test is also available in Dutch.

- Homepage Dylan Evans
- Dylan Evans on Twitter
- Dutch Risk Intelligence Test
- Dylan Evans: Emotional Equations (Pdf)