“Why We Misjudge Risk?”
Failures to judge risk abound – in 2006 Morgan Stanley’s star bond trader established an elaborate trading position in credit default swaps that he felt certain would one day yield a pure profit of about $2 billion. He sold credit default swaps on triple-A rated CDOs composed entirely of triple-B-rated subprime mortgage bonds. The elite risk taker provided information about the trades to upper management and the firm’s risk management group who registered the trades as virtually riskless. Ultimately the trade led to a $9 billion trading loss - the single largest trading loss in Wall Street history. JP Morgan Chase’s recent trading loss of just a few billion dollars seems almost modest in comparison.
How we think about risk is important – and routinely we misjudge risk. Why, for example, do people care more about the value of their financial losses and gains than the probability of the outcomes? Why are we often more confident in our abilities and likelihood for success than may be warranted? Do we naturally tend to reciprocate favorable and hostile acts when provoked?
At June’s CFO peer group meeting, the last before the summer break, participants will have the opportunity to review some of our human tendencies when making decisions and consider their impact on the choices we make. We will also consider possible antidotes to these tendencies, e.g., can we review a mental checklist that would make us better decision makers.
We look forward to seeing you and remember, if you are not yet a YTA member, please call the YTA office @ 905-415-4558 to register. Members, please use the “Register” button at the left to secure your seat.
The meeting will be facilitated by Peter Ott, CA, CBV. and Fred Peters MBA, CFA, ICD.D
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