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A New Theory of Risk and Rating [Kindle Edition]

Jacek Marczyk
5.0 out of 5 stars  See all reviews (2 customer reviews)

Kindle Price: $9.95

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Book Description

The planetary magnitude of the economic meltdown hints eloquently that conventional methods of risk management and rating need to be reviewed. In an increasingly turbulent economy a new look at uncertainty and risk is mandatory as traditional approaches have been designed for a less severe and chaotic context. The book introduces a radically innovative approach to uncertainty and illustrates how complexity management assumes a modern form of risk management which is particularly suited for a turbulent economy. Innovative complexity-based rating schemes, such as on-line self-rating or holistic rating are introduced. The book advocates that thanks to objective and verifiable ratings, which are accessible to even the smallest of companies, it is possible to contribute to a more stable and sustainable global economy. Quantitative means of measuring the fragility and stability of corporations are introduced as well as an innovative complexity-based early-warning system.

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Product Details

  • File Size: 2382 KB
  • Print Length: 106 pages
  • Publisher: Ontonix Publications; First edition edition (November 15, 2010)
  • Sold by: Amazon Digital Services, Inc.
  • Language: English
  • ASIN: B004CLYICO
  • Text-to-Speech: Enabled
  • X-Ray:
  • Lending: Enabled
  • Amazon Best Sellers Rank: #966,488 Paid in Kindle Store (See Top 100 Paid in Kindle Store)
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3 of 3 people found the following review helpful
Format:Kindle Edition
If Nassim Taleb had written this it would be required reading!

This book illustrates the limitations of the conventional approach to rating risk, particularly financial and insurance risk.

If current risk rating is based upon the "probability of possibilities" from historic data that, predominantly relates to an era of linear systems it is ill-equipped to address dynamic (non-linear) systems...and these are exactly what we have to deal with in an inter-connected world! Randomness is not merely about risk but uncertainty.

Risk Management as we know it needs to embrace complexity as a major business threat that can, now, be measured to ensure structural stability and managed to avoid collapse. Unmeasured in remains in the realms of uncertainty!

In an era of systemic risk - that travels at breakneck speed destroying structure - fragile organisations and their ecosystems can act as an "accelerant" - robust systems can act as "fire-breaks".

Financial Institutions who carry business risks NEED to, at least, supplement their current rating bases to ensure capital adequacy and to continue to offer relevant solutions for now and in the future.

As someone who has no formal scientific training I found it surprisingly easy to follow despite flirtations with Thermodynamics, Complexity, Systems, Information Theories and Zadeh's Principle of Incompatibility.
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1 of 1 people found the following review helpful
Format:Kindle Edition
The financial crisis has showed the limits and the constraints of the current models used to measure the level of reliability and sustainability of a product or a company or a country. The PoD, in a turbulent environment, where the level of uncertainty has reached unexpected levels, becomes unreliable because the speed of the change of the environment is so fast that when a rating has been issued the rating isn't already aligned to context in which the company runs its business.

The novel theory, illustrated in the book, gives an answer to why the current techniques have failed and in meantime provides a new measure of the risks based on the complexity. Complexity, although it has a relevant role in business strategies and in company governance, doesn't have the same value as other business metrics do. Complexity is a key feature and "Meta KPI" of the level of sustainability of any business model.

As it's well explained in the book, the excessive complexity reflects chaos-dominated systems, in which the structure of the business model is weak. Rapid variations of complexity, independently of whether it is rise or fall, generally point to unstable and unhealthy systems.

The examples in the book, clearly, explain the impacts and the consequences of complexity on business and in meantime give sound indications on how the company can deal with unforeseeable and unexpected events which have characterized the recent years. This fragility, as the book highlights, if not managed, can have serious consequences which, in some cases, can be catastrophic.

Therefore, in order to compete in a turbulent and uncertain environment the conditio sine qua non is that complexity must be part of the critical success factors and business metrics already used by the management of the company.
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