STRATEGIC RISK MANAGEMENT
Considering financial asset markets we are supposed to distinguish two different sources of
riskiness. First, there is the possibility of uncontrollable events (event risk). Second, there is
unpredictability of human behavior (behavioral risk). Financial markets are dominated by
human behavior. However, the stochastic approach of risk management is ignoring behavioral
risk completely, concentrating exclusively on event risk. As a result we observe permanent
trouble in banking and financial markets. The reason of this deficiency is the fact that
financial risk managers just copy the formulas that are used in natural or “rocket“ science.
This is the basic mistake. In order to overcome the deficit we use concepts developed by the
theory of behavioral finance. To be more precise, we use basic concepts of game theory. That
is what we call strategic risk management. Currently, there is no fully developed concept
existing. I hope there are students in class with some practical understanding. That can help to
find partial solutions.
Timing: december 3 to 6, 2014