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