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Why Some Firms Thrive While Others FailGovernance and Management Lessons from the Crisis$
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Thomas H. Stanton

Print publication date: 2012

Print ISBN-13: 9780199915996

Published to Oxford Scholarship Online: September 2012

DOI: 10.1093/acprof:oso/9780199915996.001.0001

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Risk Management and the Financial Crisis

Risk Management and the Financial Crisis

(p.95) 5 Risk Management and the Financial Crisis
Why Some Firms Thrive While Others Fail

Thomas H. Stanton

Oxford University Press

Chapter 5 looks at risk management and the financial crisis. Risk management involves balancing risk and returns so that a firm enhances value to itself and its shareholders. The organizational structure of risk management involves a choice between keeping risk management separate from revenue-producing activities or embedding risk managers in revenue producing units. These choices are not nearly as important as having a culture in the firm that respectfully takes risk perspectives into account. Risk officers need support from the CEO and the board. Otherwise they cannot do their jobs in the face of pressures for the company to reap what appear to be easy profits. Judgment is critical. Economist Frank Knight long ago distinguished risk, which can be quantified, from uncertainty, which requires judgment. Successful firms used judgment to add more protection than quantitative modelling would have suggested by itself.

Keywords:   risk, uncertainty, judgment, financial modelling, risk officers, returns

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