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Seeing Tomorrow

Rewriting the Rules of Risk

Ron S. Dembo and Andrew Freeman

Wiley, 1998

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Ron S. Dembo and Andrew Freeman explain how to weigh the basic elements of risk management - time horizon, scenarios, risk measure and benchmarks. They write in a direct style to appeal to the general reader, and they include numerous charts and tables to illustrate their basic principles and examples. While their mathematical reasoning may be difficult for less expert readers, it is an essential element of the book, since creating mathematical models is at the heart of risk management. With this caveat, getAbstract.com recommends this well-researched book to executives who make corporate decisions and to serious investors.

Summary

The Nature of Risk Management

Some risk is inherent in making decisions for the future, so you cannot adequately assess risk by looking only at what happened in the past or by using your intuition alone. For example, in late 1994, George Soros, one of the world’s best-known investors, and Paul Reichmann, a well-known property developer, jointly invested in development in Mexico. When their Mexican contacts asked them to reduce their return on the deal by 10% because of problems with the fall of the peso, they refused. Based on historic patterns, they thought this was just a temporary decline. Then the peso fell dramatically lower, and their partners weren’t willing to make any deal at all - until they reached an agreement much later.

To quantify investment options effectively, you need to use risk management tools. While such tools may factor in past performance, risk management goes beyond that to weigh risk, return and regret, and to help you align your intuitive judgment with more formal methods of quantifying investments. Think of risk management as if you were the person lost in a thick mist shown by Casper David Friedrich in his 1818 painting, Wanderer above ...

About the Authors

Ron S. Dembo is President and CEO of Algorithmics, Inc., a provider of innovative financial risk management software, which he founded in 1989. Dembo previously managed a risk analysis group at Goldman, Sachs, and served on the faculties of several universities, including Yale. Andrew Freeman manages and edits the financial services division of The Economist Intelligence Unit. Previously, he worked as the New York-based American finance editor for The Economist.

Seeing Tomorrow

Rewriting the Rules of Risk

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The Nature of Risk Management

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