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From risks to second-order dangers in financial markets: unintended consequences of risk management systems

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  • Holzer, Boris
  • Millo, Yuval

Abstract

The notion of risk is central to modern society, both as a productive and as a troublesome concept. On the one hand, risk refers to a situation of opportunity. Only those who undertake a risk, bear the uncertainties and face the potential adverse consequences, may gain the rewards. On the other hand, risk refers to fundamental uncertainty: at the time of risk-taking one cannot know for sure whether the opportunity concerned will be realised; in the worst case, the costs incurred might be greater than any benefit. Risk therefore increases the scope for both rational and seemingly irrational decisions: without the willingness to undertake a risk some opportunities may never be realised; the costs of an unsuccessful risky decision, however, may be intolerably high and may thus disqualify the whole enterprise in hindsight

Suggested Citation

  • Holzer, Boris & Millo, Yuval, 2004. "From risks to second-order dangers in financial markets: unintended consequences of risk management systems," LSE Research Online Documents on Economics 36101, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:36101
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    File URL: http://eprints.lse.ac.uk/36101/
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    References listed on IDEAS

    as
    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Silvia Bruzzone, 2015. "Risk forecast as work practice: between codified and practical knowledge," Journal of Risk Research, Taylor & Francis Journals, vol. 18(2), pages 170-181, February.

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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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