Book review of Dembo & Freeman’s “Seeing Tomorrow: Rewriting the Rules of Risk”
In chapter 1, the authors give more details about the Soros / Reichmann deal gone wrong which they hinted at in the introduction. It seems the reason for the deal was that Reichmann camp considered only one possible risk event (one that would be a windfall for them), got fixated on that and wouldn’t budge in the negotiations. They (inadvertently?) preferred to risk losing the whole deal rather than giving up a small portion of the profit.
Demob & Freeman writes that the way to think about risk not to consider one possible event, but to look at several different possible outcomes, explore how each event will make use react .
The chapter then very lightly mentions considerations about risk. That we all have different views of risk, that what is attractive to one is repellent to another, that risks have positive and negative aspects, that doing nothing can be risky as well.
The one interesting notion I hadn’t come across before stood out briefly:
“an acceptable risk one day might appear a foolish gamble on the next day.”
But after further reflection, this is very common in hindsight, when events that we weren’t able to consider during decision time unfold.
The second half of the chapter consist of continuing remarks about flawed and outdated approaches to risk management, examples of failures in managing risk: Orange County, the very biggest banks, etc. They also picked up on Peter Bernstein’s notion on whether modern man has replaced his earlier superstitions of the fates and the gods with new superstitions about the magic of statistics and quantifications of risk.
The topic then shifts to the idea of sharing the risk, with a story about a group of women involved in charity, who without realising it, bought futures contracts on grains.
They reveal a little more about their soon-to-be-explained framework, by noting that risk sharing (distributing the risk) is an important concept of the framework.
The last few paragraphs of the chapter – oddly - begin sounding like a marketing brochure on reinsurance. Words like catastrophe reinsurance, catastrophe insurance bonds, pure risk, packaging of business risk and so on are spoken about (with a bit of a hint of glee?) Some of the final paragraphs in this chapter may be more opaque for readers not yet familiar with insurance terms as they are used without definition.
A review of chapter 2 will come next.
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