Strategic Risk Taking
Strategic Risk Taking
Introduction
Risk pervades our daily life. Without taking risk we cannot progress. Every major advance in human civilization has been made possible because someone was willing to take risk and challenge the status quo. In man’s early days, physical and economic risk went hand in hand. Various dangers were involved even as man tried to book gains. The development of shipping trades facilitated the separation of economic and physical risk. Then came the Renaissance and scientific thinking. Various advances were made in probability theory. Harry Markowitz’s portfolio theory was another important landmark. Risk management has become increasingly sophisticated in recent years thanks to the availability of a range of financial instruments. But as the recent sub prime crisis shows, risk management continues to pose challenges. This book captures in one place the evolution of risk management, the tools and techniques to measure risk, the behavioural issues and the various ways in which risk management can help companies achieve sustainable competitive advantage. The author, Ashwath Damodaran is widely recognized as a valuation expert. In this book, Damodaran uncovers a new side of his academic personality. He covers the subject of risk management in a refreshingly different way by integrating various strands of thought and weaving them into a holistic picture.
Understanding risk
By definition, risk must have two attributes: uncertainty about outcome and impact on utility. A risk is an event where there is enough information to assess both the probability and the consequences. Risk in finance is defined as the variability of actual returns on investment around an expected return. The essence of good management is making the right choices when it comes to dealing with different risks. The most successful companies are good at finding particular risks that they can exploit better than their competitors. In the recent sub prime
Introduction
Risk pervades our daily life. Without taking risk we cannot progress. Every major advance in human civilization has been made possible because someone was willing to take risk and challenge the status quo. In man’s early days, physical and economic risk went hand in hand. Various dangers were involved even as man tried to book gains. The development of shipping trades facilitated the separation of economic and physical risk. Then came the Renaissance and scientific thinking. Various advances were made in probability theory. Harry Markowitz’s portfolio theory was another important landmark. Risk management has become increasingly sophisticated in recent years thanks to the availability of a range of financial instruments. But as the recent sub prime crisis shows, risk management continues to pose challenges. This book captures in one place the evolution of risk management, the tools and techniques to measure risk, the behavioural issues and the various ways in which risk management can help companies achieve sustainable competitive advantage. The author, Ashwath Damodaran is widely recognized as a valuation expert. In this book, Damodaran uncovers a new side of his academic personality. He covers the subject of risk management in a refreshingly different way by integrating various strands of thought and weaving them into a holistic picture.
Understanding risk
By definition, risk must have two attributes: uncertainty about outcome and impact on utility. A risk is an event where there is enough information to assess both the probability and the consequences. Risk in finance is defined as the variability of actual returns on investment around an expected return. The essence of good management is making the right choices when it comes to dealing with different risks. The most successful companies are good at finding particular risks that they can exploit better than their competitors. In the recent sub prime