BU353 Lecture Notes - Lecture 3: Enterprise Risk Management, Risk Appetite, Risk Aversion
Document Summary
Enterprise risk management: structured, consistent, and continuous process applied to an organization that fosters better understanding and ability to address their material risks relative to strategic objectives, direct drivers. Internal: board of directors, senior management, external, regulators, rating agencies. Indirect drivers: shareholders, employees, financial counterparties, customers. Increase positive outcomes and reduces impact of negative surprises. Increases opportunities for firm: reduces performance variability. Risk assessment objectives: expectations and objectives should clearly be set, stakeholder needs must be considered. Risk identification and analysis challenges: mistakes in identifying and measuring risks, known risks can be measured incorrectly, relying on historical data, focusing on narrow measures. Important risks can be ignored: overlooking knowable or concealed risks, risk perception biases, estimating and forecasting traps, anchoring trap, status quo trap, overconfidence trap, prudence trap, recallability trap. Cons: prone to individual biases doesn"t get interdependencies between risk factors. Tends to create very large list of risks, many of which are not significant.
