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Elimination of Risk in Systems: Practical Principles for Eliminating and Reducing Risk in Complex Systems Hardcover – March 1, 2002

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Editorial Reviews


There are some very good parts to this book. One can easily appreciate the author's wisdom in promoting risk control. -- James Kallman, Ph.D., in The Journal of Risk and Insurance, Vol. 70, No. 4, Dec., 2003

From the Inside Flap

What is a system anyway? This is the first question answered by this book: It explains how a system is an entity with resources, that generate output from input, and how a system is usually built up from many levels of subsystems too.

Building and running systems to generate useful output is a very large part of what human beings do. So it is not much wonder that they devote very great effort to getting those systems to generate as much useful output as possible.

There are only three ways to do that. The simplest is to increase the resources of the system. For example, if your system resources are $1,000 invested at 5% to give an output (income in this case) of $50 a year, you would double your income by doubling the $1,000 of resources invested.

The second way does not involve increasing the resources. It's complicated, however, but that has never stopped humans eager to save a dollar's worth of resources. What you have to do is share the resources between different activities going on at the same time -- a complex juggling act, to ensure that few resources are ever idle.

A downside to this resource sharing, or juggling act, is that it creates some rather peculiar risks of loss of system output. One is the risk of collisions, where systems literally mangle each other. This can happen at an airport, for example, when one plane on the ground runs into another plane -- with which it happened to be sharing a runway. The other is the risk of a deadlock, or a logjam. Early in the book, there is an insightful analysis of the pros and cons of resource sharing.

The third way to increase the output of a system, without having to increase the system's resources, is to shift it to a different operating environment, in which there is positive risk. The investor with $1,000 of investment resources does this when he or she shifts the funds from safe Treasury Bills to common stock. This is where things get serious, because risk means that every so often you will get a lot less output (or income) than you had hoped for.

In the financial systems arena, two opposing groups, the academic beta-theorists in business schools, versus the Wall Street followers of the teachings of the late Benjamin Graham, have never seen eye to eye on how risk is best dealt with.

The beta theorists have maintained that you should run positive risk, and be content with the small extra output (or income) that you get for running the risk, as an average of large swings in output, up and down.

The Ben Graham followers say rubbish! You should not be led as a lamb to the slaughter! You must eliminate as much of the risk as possible. The beta theorists reply: Sorry, but it can't be done.

The dispute also reverberates in the non financial systems arena: in computer, engineering and business systems.

This simply written book clearly explains how the dispute can be resolved, in an insightful manner that shows us how to eliminate risk in systems of all kinds, while retaining the benefits of the extra throughput, or return, for running the risk.

Dust jacket image courtesy of the U.S. Department of Defense.


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Product Details

  • Hardcover: 180 pages
  • Publisher: Tharsis Books (March 1, 2002)
  • Language: English
  • ISBN-10: 0968750222
  • ISBN-13: 978-0968750223
  • Product Dimensions: 0.8 x 5.5 x 8.2 inches
  • Shipping Weight: 11.2 ounces
  • Average Customer Review: 5.0 out of 5 stars  See all reviews (1 customer review)
  • Amazon Best Sellers Rank: #10,240,838 in Books (See Top 100 in Books)

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Top Customer Reviews

Albert Einstein once wrote that you should never despise simple books.
This is certainly an example of a simple book, about the ideas and principles behind risk, which the author explains thoroughly. It is full of insights too, and will probably never go out of date. It gives you a clear understanding of risk in any context, financial or otherwise.
A new, easy to understand risk measure, the author's invention, is central to the book. He uses it effectively to explain the well known but hard to understand standard deviation measure of risk. He also uses it to derive a new version of the risk equation that makes risk elimination and reduction possibilities almost obvious. The original risk equation, over which the author's version is a clear improvement, was first proposed by William Sharpe.
But be warned. This is a book for ideas people only. The author is clearly only interested in principles. (The front cover does state that the book is about practical principles, and means it.) All of the author's examples, many of them almost trivial, are geared to getting the reader to understand a unified set of principles represented by a few basic equations. Nowhere will you find a detailed method for carrying out some specific complex operation, either in finance or everyday systems. The author obviously assumes that if you have understood the principles, you will be able to figure out what to do in any situation, even an entirely new one.
Some people are not very comfortable with ideas, concepts and principles, however, especially application of principles to new situations. They are more comfortable dealing with complex specifics and standard procedures. Such readers may react negatively to this book, since it lacks specific information about any specific situation. With that caveat, I rate it five stars. I found one obvious typographic error near the end, inside an arithmetic expression that came out right.
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