Product Description
This is the eBook version of the printed book.Front Flap In business and investing, risk has traditionally been viewed negatively: investors and companies can lose money due to risk and therefore we typically penalize companies for taking risks. That’s why most books on risk management focus strictly on hedging or mitigating risk. But the enterprise’s relationship with risk should be far more nuanced. Great companies become great because they seek out… More >>
Strategic Risk Taking: A Framework for Risk Management
Tags: Framework, Management, Risk, Strategic, Taking
5 responses to Strategic Risk Taking: A Framework for Risk Management
Too often people consider risk a negative that is to be reflexively avoided. However, if we take the time to look we will see that this is really contrary to our everyday lives. We take risks all the time, but we think we understand them and we assume that the negative outcomes are low cost compared to the benefits we can gain. Businesses invest in projects with risk because they have have calculated a positive expected return. Also, we know that US Treasuries are all but risk free and their return is low. Junk bonds have a high risk and they must provide a possibility of high return to pay purchases for taking on their risk. The trick is to be able to learn about the true nature of the risk and to set up a situation where, to you, the expected return will be large enough to invite you to take on the risk of loss.
The book is in three parts. Chapters 1-4 discuss a definition of risk, why we care about risk, what do we think about risk (versus what do we think we think about risk), and ways of measuring risk (while all the chapters are good, this one is especially interesting).
Chapters 5-8 cover tools you can use to understand and evaluate risk and return. Risk adjusted value, Probabilistic Approaches (you know, scenario analysis, decision trees, simulations, and fitted distributions.) This is all explained in a way that a person with just basic mathematical skills can understand the discussion well. This is not a book limited to just quant oriented PhDs.
Chapters 9-12 take you through what the author calls “The Big Picture”. First, he talks about the “conventional view” of discounted cash flows and other relative valuation models. However, the then presents an expanded analysis using the same DCF and Relative Valuation and then option pricing. Damodaran then gives a few pages on hedging and some comments on when risks pay off and what you should consider when developing your own strategy. Chapter 10 talks about risk profiling and hedging, chapter 11 finally lays out the author’s concepts of Strategic Risk Management. That is, why you should exploit risk, how you go about it, and how an risk taking organization should be built. The last chapter is a kind of pep talk to get out there and do it right. He reviews the core ideas of the book and lays them out as principles to etch into your mind.
A very good book. It is interesting, useful, and clearly written with just enough math to explain the concepts without overwhelming those without deep math skills.
Reviewed by Craig Matteson, Ann Arbor, MI 48103
Rating: 5 / 5
Too many of the books I have read on risk deal with the subject as something to be avoided.
Risk, properly assessed and entered into with open eyes, is essential to business and investing success. In Strategic Risk Taking: A Framework for Risk Management, Aswath Damodaran covers both sides. He offers a framework to limit some risks and exploit others.
The New York University finance professor draws a thorough portrait of risk measurement, hedging, and mitigation. He discusses the broad range of risk assessment tools, including risk adjusted value, scenario analysis, decision trees, VAR, and real options. Damodaran goes further. His discussion of when to increase risk exposure is insightful and rarely found in risk management texts.
Damodaran argues there are 10 principles that should govern all risk assessment and management. Risk:
1. Is everywhere.
2. Is threat and opportunity.
3. Evokes mixed feelings about its existence.
4. Is not created equal.
5. Is measurable.
6. Measurement and assessment leads to better decisions.
7. Should be apportioned. The key to risk management is deciding which risks to avoid, to pass through and to exploit.
8. Management results in value creation.
9. Management is everyone’s job.
10. Taking organizations that are successful do not arrive there by accident.
Simply put, this is the most complete treatment of risk I have read. Proper implementation of its principles will help readers drive increased returns and value.
Rating: 5 / 5
Insightful of broad risk taking without going to deep into single subjects. Readers interested in gaining deeper knowledge can then find specific books on the subject. I found chapters 11, Strategic Risk Management, the most orginal. Again, no great depth but a great big picture view on fundamental issues in risk taking such as ‘Value and Risk Taking’, ‘Evidence on Risk Taking and Value’ and ‘Building the Risk-Taking Organization’. It’s not a book for traders rather for corporates excecutives/risk managers/consultants/students and … maybe for for academically inclined entrepreneurs.
Rating: 4 / 5
This book provides an excellent over view of the risk management principles and explores rarely covered aspects like “how to measure the level of risk aversion”.
This book should be on the shelf of every risk manager and safety engineer.
Rating: 4 / 5
Many businesses could do a better job of exploiting risks. Unfortunately, not every business manager knows how. In his perceptive book, Aswath Damodaran details the principles and tools that most good risk managers use. Some of his work resembles a textbook. Appendixes with mathematical proofs of risk assessment models follow several chapters. But the book is mostly a readable blend of qualitative and quantitative insight. The author uses math more to illustrate concepts than to reduce them to equations. For students of risk management, this is great supplementary reading. getAbstract also believes this book would be an especially useful reference for specialists in corporate finance and investment management.
Rating: 5 / 5
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