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The Nature of Risk Paperback – July 17, 2012
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Garrison Keillor once remarked that cats are intended to teach us that not everything in nature has a function, but David X. Martin rounded up a menagerie of forest animals to ferret out the risk function. Described as an easy-to-understand introduction to managing risk, the 67-page book is also quick to read and simple to follow. The merciful brevity of the text is also surprising given the author’s previous roles as founding chairman of the Investment Company Institute’s Risk Committee, chief risk officer at AllianceBernstein, and a Bloomberg Television market commentator, among other things. After wrestling with the bears and running with the bulls of Wall Street for much of his career, Mr. Martin certainly knows his financial wildlife.
So with an implicit nod to Aesop’s fables, the author’s tale relies on eight tails—a rabbit and a turtle, a deer and a bear, a red fox and a red squirrel, and a beaver and a gray squirrel—to compare how each of them manages the risk of a forest fire.
There’s a second team of creature consultants offering advice, but the rat snake is a fast-talker taking care of #1, and the eagle was flying too high to notice the fire. Only the woodpecker was flying close enough to the ground to offer simple, practical suggestions to his tapped out neighbors.
As an introduction to risk, the book should get people thinking about everyday risk around them in the same way that Spencer Johnson’s 1998 Who Moved My Cheese got its readers thinking about the impact of change on them and their careers. Young or old, new or experienced, The Nature of Risk” works as a conversation starter at the next risk roundtable or a pre-reading assignment for an introductory class on risk management. A visit to the author’s website offers some intriguing extras including a link to Edge Magazine’s “The Nature of Risk Quiz” to test readers’ comprehension of the various risk profiles of the animals. The story lacks a quick brown fox to jump over a lazy dog, but it isn’t intended to be a typing test, just a risk primer.
Things should be made as simple as possible, but no simpler, Albert Einstein advised. David Martin’s The Nature of Risk meets that standard.
-Dev Strischek, The RMA Journal
Those who wrangle daily with risk can often provide insight to the broader nature of uncertainty, peril and payoff.
In the investment realm, David X Martin, a senior adviser at management consultancy Oliver Wyman, has written…The Nature of Risk, a short parable for newer investors which portrays different types of risk-takers as forest animals, showing the strengths and weaknesses of each.
-Sue Shellenbarger, The Wall Street Journal
Several weeks ago I read a review of David Martin’s The Nature of Risk in the RMA Journal and bought a copy. It is a brief (75 pages) Aesopian fable on the nature of risk as seen through the eyes of numerous animals: red and gray squirrels, rabbit, beaver, bear, turtle, deer, eagle, rat snake, woodpecker and a fox.
Faced with, first, a modest brush fire and, later, a major forest fire, each animal has a story of “instinctual approaches to survival” as they “balance risk and reward,” most poorly and a few well. Some avoid risks, some “run with the herd,” some are oblivious, and some “change their approach so often that they really don’t have an approach at all.”
The Red Fox, the heroine (a woman, naturally!), “constantly reassesses the risks” around her and, as well, keeps “an eye out for opportunities.” The Beaver is also an opportunist.
Brief, simplistic, but amusing.
-Felix Kloman, Seawrack Press
About the Author
David X Martin, an internationally recognized expert on risk management, is a senior consultant at global management consulting firm Oliver Wyman. His long career includes stints at PricewaterhouseCoopers (PWC), Citibank, and AllianceBernstein. He has extensive experience working with regulators and sovereign governments, and at one time or another has been responsible for the oversight of investable assets, investment strategies, operations, quantitative research, distribution channels, trading, and investment banking. He also has extensive experience running financial holding companies, and overseeing acquisitions and the creation of new banking businesses. Mr. Martin was the founding Chairman of the Investment Company Institute’s Risk Committee (ICIRC), Co-Chair of the Buy Side Risk Committee—composed of the Chief Risk Officers of the twenty largest asset management firms—and a member of the Sanctions Subcommittee of the US Department of State’s Advisory Committee on International Economic Policy. Presently an adjunct professor at NYU’s Stern School of Business, he has published numerous white papers on compliance and risk, enterprise risk management, corporate governance, and cyber security, as well as Risk and the Smart Investor, published by McGraw Hill in the fall of 2010. While Chief Risk Officer at AllianceBernstein Mr. Martin also served as a Director of Sanford Bernstein LLC. In those capacities he was responsible for the oversight of over $875B in assets, and was a member of the firm’s committees on valuation (Chair), ethics, internal controls, compliance, new product approvals (Chair), fraud, business continuity, and information security. He has participated in innumerable industry conferences as a featured speaker and expert panel member, and has provided market commentary for Bloomberg Television. At Citibank, working with both John Reed and William Rhodes, David X Martin developed and implemented a comprehensive process of enterprise risk management known as Windows on Risk. There he focused on understanding macro-economic trends, continually reassessing the company’s global risk profile, and proactively managing risk. He worked regularly with the Citicorp Board, rating and regulatory agencies, major corporate clients and investors, payment systems, and sovereigns. Mr. Martin, a Certified Public Accountant, earned his BBA from Baruch College and received his MBA from New York University’s Graduate School of Business.
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Presenting all financial "risk" and "return" in terms of only a) volatility and b) long-term expected returns is a big problem for almost anyone who finds themselves in an unusual situation or having to make sudden and unpleasant decisions. I really liked this presentation and structure for explaining how and why not to think that way, and I've recommended the book to others.
This is a difficult book to review, because if I describe what happens, I end up spoiling the book. This is a small book, and I read it in less than an hour.
This book came into existence because the author had a hard time explaining risk to the family of a friend who had died, and then his own family. He wanted to come up with a simple way to describe risk to those who don't know markets. His tool was using common animals in a forest to explain risk, because their behaviors mimic those of different sorts of people as they face risks, or decide to ignore risks.
One thing I appreciate about the book is that it takes an ecological approach to risk. My view is that markets are not like physical systems, they are like ecological systems.
Risk can never be eliminated, but it can be prepared for and managed. I think that is the main message of the book.
For most of you reading me at Aleph Blog, this book would be fun for you but not necessary for you. But consider some of your friends and family members that are not as sharp as you. Personally, I am planning on having my wife and kids read this book. Living with me, they pick up a lot, but this book is a clever way to teach risk management without making it seem like it is being taught.
To me the real use of this book is to teach less market oriented friends, family, and children about risk. This is a small, simple but powerful book.
For those that are advanced, and want something more meaty, please read my review of the author's book, Risk and the Smart Investor. Risk and the Smart Investor Other links available at my blog.
It's a little book, and it is a very good book, but 15 clams for such a small book? I would have priced it at $10 or so.
Who would benefit from this book: This book is designed for beginners and intermediate investors. Get it as a gift for friends who you think are taking too much risk, and don't get that. Or, use it to educate young people about risk.
I recommend you, your family, your team, and your board read the Forward to this book and skip the last chapter.
The Forward is the fascinating story behind this story book: the sudden death of David's friend forced him to confront the family with the fact that the friend had not managed family financial risks well. And when David tried to "teach" the family the basics of risk management, they were not interested. This book is a result of that rebuff: a fable about animals in the woods and how they confront or deny risk.
The heart of the book is clever and the story has coherence/drama. It works well for children and adults.
If your board or team stops reading this book at the conclusion of the story, try this exercise: self-identify yourself as a bear, a red tail squirrel, a black tail squirrel, or a fox. Once that is done, have the others in the room write down how they perceive you on a confidential basis. Do you see yourself as others see you? And what does it mean to be a fox or a black tail squirrel?
The final chapter explicitly defines "what it all means." And that is the most disappointing part of the book. It is too lite a book for realistic "answers."
But that is not the purpose of this book.
This book is an easy and charming way to get a family, a board, or a team to confront this issue: "Are we asking the right questions when it comes to risk?
--Larry Stybel, Boardoptions.com