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Large  financial  loss  is not  necessarily a failure of risk management

  • The managers took risks they should not have, but that is not a risk management issue as long as the risks were properly understood
  • Rather, it is an issue of assessing the costs of losses versus the gains from making large profits.
  • Example: Failure of LTCM
  • The decision depends on the risk appetite of an institution
  • Defining the risk appetite is a decision for the board and top management
  • With good risk management, large losses can occur when those making the risk-taking decisions conclude that taking large, well understood risks creates value for their organization

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