Customer Reviews

Seeing Tomorrow: Rewriting the Rules of Risk

5 star:		(8)
4 star:		(5)
3 star:		(2)
2 star:		(1)
1 star:		(1)

 

 

I found this book to be very uneven. Obviously, the book focuses on the concept of "Regret" - the negative effect (and feelings) that accompany a decision that goes bad. The authors claim there are four main elements to risk management:

1. A time horizon (agreed)
2. Scenarios (OK)
3. Risk Measure (see comment below)
4. Benchmarks (how are these set other than arbitrarily?)

As one would expect, they do give good treatment to the theory of regret and also touch upon, albeit uncritically, Kahneman and Tversky's theories on framing. (Nice theory, but ought to be challenged more than it is) They also touch upon some other
interesting areas, but otherwise I found this book to be fairly thin gruel.

There are a few flashes here and there - for example, a mordant expose (p. 86) of how the market, which is supposed to be so rational, (i.e. so knowledgeable) actually depends on the ignorance and foolishness of buyers!

The upside of this book (pardon the pun):

The authors conclude that risk is "an extremely subtle and complex idea, full of fascinating byways and confusing cul-de-sacs." I think they are right on that call and those of us who use a more narrowly circumscribed definitions of risk are wrong. They also call insurance what it really is: risk sharing, not risk transfer as it is usually, and IMHO, incorrectly called. They also have a healthy skepticism for a number of performance measurement criteria, noting how they can induce dysfunctional behaviour. (See Alfie Kuhn's "Punished by Rewards" for an unabashed treatment of this topic)

The regret (groan - I bought my copy): The book makes dubious claims that regret has been neglected in risk management. The authors obviously do not read the same risk management books as I do. The book has an index but lacks references: the only footnote in the book was one of the author's! There are factual errors -ones so simple to check they raise other questions for instance, NAFTA was signed on 17 December 1992 by outgoing President Bush, not in 1993 by President Clinton, as claimed by the authors (p. 15). They make ill-informed and unrealistic statements about ValuJet and several of their examples border on the absurd.

I think the authors are also careless with some of their thoughts - scenarios are not "observations about the state of the world at some predetermined future time" That is an impossibility. They may be constructs, assumptions, hypotheses, forecasts, etc., but NOT observations! This may seem like nit-picking, but there are too many examples to let this pass by,
and they becomes increasingly bothersome - and the credibility of the book suffers at the same time.

In arguing that risk is in the future, the authors overlook the latency of risk factors. This error is further compounded by the authors continually referring to "measuring risk." If risk lies in the future and the future is uncertain, then we cannot "measure" risk, only estimate it.

There are some delicious ironies in this book: (1) The authors perplexingly highlight the risks of using formula, but offer nothing in its place but other formula. (2) Although purportedly quantitative, it hinges on regret - which the authors acknowledge is a subjective feeling - and the construction of equally subjective benchmarks and scenarios. It confirms a long held personal view of mine that those who find themselves at the extreme ends of the "qual" or "quant" spectrum, are actually kissing cousins! I prefer to be somewhere in the middle - an extreme moderate, as it were.(;-)) (3) The authors hold J.P. Morgan, out to be something of a clairvoyant with risk - even having developed its own software "RiskMetrics" to do so. However, those familiar with the Enron debacle will know that JP Morgan is highly exposed as one of Enron's two bankers (Citcorp being the other)

In sum, this book may be useful for explaining financial risk to non-financial risk managers, but I have to confess some disappointment with it as regards general risk management.

Help!....I just rushed my money to the Rules of Risk by Ron S. Dembo and Andrew Freeman and there is one major flaw here.........It is a complete rewrite to the word of the book by the same authors called Seeing Tomorrow.......Line for line, word for word, chapter for chapter...........The Seeing Tommorrow was written in Canada in ISBN 07710-2612-9 and printed by MdcClelland And Steward in 1998........Now in big fanfare they bring back the same damn book with a different title........HELLO.......AM I MISSING SOMETHING.......2.... Imagine you have read the best book on investment strategy you have ever read in your life called Seeing Tomorrow.....so naturally when you see that the same two brilliant authors have teamed up again you cannot rush your money to the Amazon people fast enough.......then the big day comes and guess what........deja view all over again....3.....It would be much fairer to any reader to know that this is the newer paperback version of the older book.........the book is brilliant, but this is unacceptable confusion.........thank you......

I guess Dembo's concept of regret applies here. After reading glowing comments by Peter Bernstein and Steve Ross, I was really excited to read the book. I finished it wanting more.

The book does make some very good conceptual points - specifically that risk management should be forward looking and not backward looking. But the hype for REGRET is overblown. After bashing economic theory, the authors present Expected Upside Value - constant*(Maximum probable loss) as a decision metric. Hmmmm, let's see, if the constant is greater than one this is essentially a simplified utility function. Smells like economic decision theory to me....

For the mathematically inclined, the book is a quick read and worth a quick look. For the non-mathematical manager the concepts are definitely worth reading and thinking about. Nothing earth-shattering, but better than most.

I read this book hoping to find an improvement on the Rules of Risk. Sadly disappointing. Its filled with technical errors and claims of discovery of great truths on areas already commonly understood. When I discovered technical issues in the book I turned down a corner of the page. 87 pages were marked when I finished. This book is a unique combination of badly written, frequently incorrect and restatements of the obvious. I strongly recommend not wasting your time and money.

Dembo's book covers an often misunderstood concept and that is risk tolerance. He approaches risk tolerance from a new perspective, although one most financial professionals would recognize from their experience. Dembo has put it into words and form. He clarifies many misconceptions. Along with Charles Ellis' "Investment Policy" and Donald Trone's "Management of Investment Decisions" this completes the "must have" trilogy. Robert Levitt, CFP, CFA, Levitt Novakoff & Co., L.L.C.

This book establishes a strong foundation in risk management. It leans substantially on decision theory and behavioral economics. Its main concept is "regret." Regret is downside risk. We can insure against that downside risk by buying a Put option. Even if we deal in illiquid markets where such options are not available, it is still key to calculate the economic value of regret or of that Put option (if it were to exist). Similarly, the upside of a transaction is equivalent to buying a Call option. Mr. Dembo comes up with this equation: Upside - Lambda(Regret). Lambda captures your risk tolerance. If your risk tolerance is high, Lambda will be small. The inverse is true too.

With this straightforward model, the authors can explain a whole lot of economic incentives with a behavioral component. For instance, you can easily explain why most people would not mind playing roulette with just a dollar bill. But, the same people would not play with $100 dollar bills. In effect, most people would rather take on a bad risk (with poor odds) on a small scale, than take on a better risk (better odds) on a larger scale.

Ron S. Dembo and Andrew Freeman explain how to weigh the basic elements of risk management - time horizon, scenarios, risk measure and benchmarks. They write in a direct style to appeal to the general reader, and they include numerous charts and tables to illustrate their basic principles and examples. While their mathematical reasoning may be difficult for less expert readers, it is an essential element of the book, since creating mathematical models is at the heart of risk management. With this caveat, we from getAbstract recommend this well-researched book to executives who make corporate decisions and to serious investors.

Although I do not agree with the subtitle, this book does NOT rewrite the rules of risk at all, this is an excellent book for the novice or early academic on this subject. I recommend it almost without reservation and STRONGLY recommend that it be read in tandem with "Against The Gods" (which see).

Professor John Kercheval

Georgetown

Washington, DC

This eminently readable book is for a curious general reader who wants to better understand how modern risk management techniques can actually be applied to thinking about and making choices in everyday life. Unless you are allergic to even the most basic of probability theory and statistics, you should find that this book places the building blocks of risk analysis - time horizons, risk measures, benchmarks and scenarios - in the hands of folks who are other than investment and risk management professionals, without entering into the arcane language of derivatives and portfolio theory.

But the book is not itself a key to quick riches. The authors rightly point out from the beginning how the image of the so-called science of risk management provides an illusion of security that has been disproved again and again, with a long catalogue of risk management catastrophes among major names in high finance. They quote Peter Bernstein whose book called Against the Gods (which I have also reviewed on this website) provides a historical perspective on risk management, and ask whether belief in this false security of risk management is no better a modern version of ancient faiths which placed fate in the hands of deities and shamans.

This book is original in that it reduces the complexity of risk to its base elements, and looks at circumstnaces of a given individual, and his or her specific risk tolerances, and the unique reasoning behind his or her choice-making. The chapters are articulated in language which is as jargon-free as possible (Sweet Regret, Keeping Up With the Joneses, The Rap Trap And Evalauton, etc.) for an important subject in which jargon unfortunately has been one of the barriers to more popular understanding.

While it is highly improbable that this book will help you beat the market in managing your investments, you might see how it is possible to think more systematically about common decisions such as whether to buy a house, invest in a college plan for a child, or refinance a mortageg, as well as to understand some of the complexities of public policy choices in which risk is invariably a looming factor.

Dembo and Freeman approach risk from a very fundamental point of view, going back to the psychology of decision making. In their mark-to-future framework, decisions are evaluated by their expected value across multiple possible scenarios and risk has a different meaning for each decision maker, according to their expected Upside and Regret. For all those exposed to concepts such as Value-at-Risk, this will help put things in perspective.