Danger, Risk, Opportunity

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

I am currently reading Aaron Brown’s book, “Red-Blooded Risk: The Secret History of Wall Street”.  http://www.amazon.com/Red-Blooded-Risk-Secret-History-Street/dp/1118043863/ref=sr_1_1?s=books&ie=UTF8&qid=1360434108&sr=1-1&keywords=red+blooded+risk.  I had read one of his earlier books, “The Poker Face of Wall Street” and quite enjoyed it.

From his Amazon bio, Mr. Brown states: “I'm the author of "Red-Blooded Risk" and "The Poker Face of Wall Street," and a co-author of "A World of Chance."  My day job is working for AQR Capital Management.  I also am a columnist for Wilmott and Quantum magazines, and write for a lot of finance and poker periodicals; as well as teach classes and speak at conferences.  I serve on the Editorial Board of the Global Association of Risk Professionals and am a member of the National Book Critics Circle.  In past lives I've been a professional poker player, trader, finance professor, portfolio manager and head of mortgage securities.”  In other words, he has some credibility to write about issues of risk.

One of the points that Mr. Brown makes early on is the difference between risk, which is two-sided in that bad or good things may happen, and danger, where only bad things may happen, and opportunity where there is the possibility of something good happening.

As readers of my blogs, or those who have attended my seminars, or been one of my consulting clients know, I am zealous in that risk managers must understand that risk is two-sided.  As I have said numerous times, risk is the possibility that bad or good things may happen, and thus risk management is managing to increase the probability and magnitude of good risk occurring while managing so as to decrease the possibility and severity of bad risk events happening.”

Risk managers, regulators, senior managers, as well as other stake-holders cannot confuse risk with danger – although that is what is constantly done.  Risk can be good or bad, while danger is always bad.  Risk is a part of business, and companies need risk in order to grow and thrive.  Confusing risk with danger changes the risk management function – and not for the better.