How Can I Mitigate Risk?

Risk control means that the risk manager adopts various measures and methods to eliminate or reduce the various possibilities of risk events, or the risk controller reduces the losses caused when risk events occur.

Basic Information

Chinese name

Risk Management

Foreign name

Risk management

Control Method

Risk control refers to various measures and methods adopted by risk managers to eliminate or reduce

The four basic approaches to risk control are:

A "gamble"

A "gambling" is going on: if you guess the right player, you get $ 60; if you guess wrong, nothing.

"If anyone needs to spend $ 20, who wants to buy this opportunity?" Burke Robinson asked.

This is a "risk management and control" course at Stanford University. Robinson on the podium is a consultant professor of management science and engineering at Stanford University, a world-class decision-making expert, and a former managing partner of consulting firm Strategic Decisions Group.

Sitting under the stage are students from more than 30 countries who have crossed the ocean to study here. Now their brains are entering the tenth stage of decision-makingchoice.

Earlier, Robinson has used coins to illustrate that he can use a "decision tree" to help implement "structured decision-making." For example, as for the uncertainty of the coin's face, everyone knows that the success rate is 50. When the coin becomes a landing, the needle Who would pay $ 20 for this investment opportunity when heading for a possible pushpin?

Gambling, or not gambling? In this rapidly changing world, making a choice about an uncertain future is a brutal "gambling" that entrepreneurs often face.

But no one expected that the first one to pay $ 20 to Robinson's hands was Xiang Xianquan, director of Zhejiang Xintaizhou Law Firm, a senior lawyer who handles economic disputes all year round.

"Gamble on the pin tip"

From a coin flip to a "pin" game, you need to clarify some basic points first.

If the maximum profit from playing a coin is $ 60, then based on a 50% probability of facing each participant, the average gain for participants is $ 30. But this is just a statistical theoretical calculation, and in real life, unless he can play many times; he will either get $ 60 or get nothing.

"A lot of investment decisions are only one-time decisions." Robinson said that this is where the game risks, and the meaning of the decision. Decision making is an immutable allocation of resources. "It is a controllable behavior, but the development of events and results are uncontrollable."

However, "coin-throwing" games are still worth a gamble, because participants can still get a "+10" dollar return compared to the $ 30 expected value at a cost of $ 20.

But when the investment opportunity changes from a coin to a thumbtack in a cup, things are different. The first difference here is that some people think that the probability of the needle orientation is still 50%, while some people think that the probability of a certain orientation is more Higher

As a result, people may stand in three columns: the first column is for people who have no concept of the direction of the pushpin, their ending is the same as guessing the direction of the coin, and the probability of right and wrong is 50% each; People who prefer, but do nt know why.

Will things be different for them?

You can first assume a strong bias: the needle is biased upwards by 80%; downwards by 20%. Then, the participant's probability of guessing upwards is 80% times 50% = 40%; the probability of guessing downwards is 20% times 50% = 10%, that is, the probability of guessing correctly is 50% (ie, 40% + 10%). In other words, it is not important whether the pushpin has a tendency or not, because the probability of right and wrong is still 50%.

However, there is a third situation where participants believe they know what the needle's propensity is. This is precisely the original intention of Xiang Xianquan to step forward and "participate in gambling."

When Robinson asked, "What do you think is the tendency of the needle to point up?", Lawyer Xiang replied, "80%."

The audience laughed, but this answer explains exactly why he rushed so fast-if he thinks he knows where the needle is 80% inclined, then 60 times 80% = $ 48, the expected return of this opportunity That's 48-20 (cost) = $ 28.

There are indeed many opportunities based on this subjective probability + term.

"How much information do you want to pay"

However, Xiang Xianquan did not expect to face so many choices before guessing the pushpin A after Robinson's shaking. -

"Now, there is some information that seems valuable to your guess," Robinson asked, "assuming I have good eyesight and memory, and I won't lie, how much would you pay for this information?"

This is the "information fee". Investors know that if they have additional information, they may get a higher probability of correctness. Xiang Xiang immediately said that he was willing to pay "$ 30".

His calculation formula is as follows: 60 (benefit) -30 (information fee) -20 (cost), can still earn 10 dollars steadily. This formula was strongly dissent from the students. "For policy makers, the past stage has been surpassed after taking office, and the sunk cost of the initial $ 20 should no longer be remembered." Everyone said. '

Robinson said that this is indeed a typical mistake. Many people go to the second step and habitually think about the first step. To explain how much the information fee is worth; he asked, "If I give you money now, how much would you sell me the chance to gamble?

Bids skyrocketed from $ 20 to $ 25. Attorney Xiang couldn't help it "OK!"

This can be regarded as his risk-adjusted valuation of investment opportunities. It seems that this is the point: if you get the information, you can make $ 60, if not, you will get the possibility of a profit of $ 25. In this case, the value of the "information fee" is 60-25 = 35.

However, lawyer Xiang is smart. He suggested that bargains should be made and he was unwilling to pay the highest price of 35 dollars to buy; the reason was that there was no perfect information in the world. For example, companies may do market research and various research advances, but in fact they get imperfect information.

Therefore, when Robinson asked again, he would shake another pushpin B to get some results, Xiang Xiangquan said that he would only pay "6 dollars" for one shake.

In the end, Robinson shook pushpin B three times and turned up. Statistically, these three shakes are of great significance, but because the number of times is too small, participants must still adopt them carefully and cannot be misled.

Finally, you can guess the direction of pushpin A. Xiang Xiang said that he always thought that 80% of the pushpins are facing upwards, so he should have been lying there waiting for his pushpins to be "up".

However, Pushpin A made a joke with the lawyer, and the final gesture was "five body vote." ·

The audience laughed.

At this time, Robinson said that the above question just wanted to know the trainee's thoughts. In fact, the lawyer's bid was not the optimal decision, because for him, if he bought the information, he could get a steady $ 60; if he didn't have the information, his expected return was $ 48. So in fact, the highest price of this information should not exceed 60-48 = 12 USD.

In other words, Xiang's one-time bid of 6 yuan is still too high, because 6 times 3 = 18 dollars is greater than 12 dollars.

·

The combination of "Cross-Strait Coffee" and "Goldman Sachs"

Next came Jin Meiyang, president and general manager of Zhejiang Cross-Straits Food Chain Co., Ltd., who won the game, but also faced a new choice-whether to get away with 60 dollars or invest another 40 dollars to get a dice opportunity.

The rules of the dice are as follows: If l is displayed, then the player will lose all his money; if 2, 3, and 4 are displayed, the profit will be 120 dollars, and if 5 or 6 is displayed, the profit will be 240 dollars.

This looks like a good business: according to the probability, Jin Meiyang has a 1/2 probability of getting 120 dollars, a 1/3 probability of getting 240 dollars, and a 1/6 probability return of zero dollars. In other words, the expected return value is 120 times 1/2 + 240 times 1/3 + 0 times 1/6 = 140 dollars.

However, before deciding to invest; she has other options, such as finding a partner?

This means that the expected return on gold is reduced, but the risk is also reduced. The audience was extraordinary, and eventually joined the battlefield was Liu Xiaoren, chairman of Red Ding Ventures, the first private venture capitalist in China to form a company in a more standardized partnership system;

Because Jin Meiyang's "Cross-Strait Coffee" just recently received about $ 30 million in investment from Goldman Sachs, the combination is also nicknamed the "Cross-Strait Coffee + Goldman Sachs" combination. The partnership plan after the bargaining between the two parties is as follows: "Goldman Sachs" pays $ 40 if it gains; the two parties share it according to the proportion of capital contribution.

"Now, are you willing to buy insurance?" Robinson made another choice. The cost of buying insurance is $ 20, and the effect is-if the dice shows an I, then the combination can still get $ 60.

If the combination decides to accept, then the expected value of income will become 240 times 1/3 + 120 times 1 / 2-40 (cost) + 60 times 1/6 (insurance payment)-20 (face insurance) = 90 dollars, income Although it has been reduced ... the risk has also been reduced.

"Are you willing to pay another $ 10 for diversification?" However, the professor followed immediately. This means: the combination can roll two dice, each time the return is half of the original return. In other words, they have a 1/4 chance to get 120 dollars and a 1/9 chance to get 240 dollars, but the risk of zero returns also becomes 1/36.

If both recommendations are adopted, the likelihood of the portfolio falling into extreme situations will also be greatly reduced; investing in sound conditions. However, the board of directors at the scene diverged, "Cross-Strait Coffee" hesitated, and "Goldman Sachs" insisted on buying.

In the end "Goldman Sachs" persuaded "Cross-Strait Coffee". Fortunately, this is the case, because the numbers displayed by Kim and Liu are "1" and "6". That is to say, the portfolio gets a return of 30 ("insurance" + diversified investment "after 0 returns of 30 + 240 times 1/2 (diversified investment) = $ 150.

"Reward good decisions; not good results"

Robinson said that this is not gambling, but a game that helps decision makers understand how to make good decisions. "Companies should reward good decisions instead of good results." He emphasized.

Even if Xiang Xianquan loses the game, the professor still calls for his applause; the reason is that it is a good decision to enter the game with a subjective probability of 80%. Encourage decision-makers to take the greatest risks within a reasonable range. "

This may sound a wake-up call for Chinese entrepreneurs. Generally, they tend to value results more, but the results are often uncontrollable, and the company can only control good decisions.

"Chinese people always ignore risk. Chinese entrepreneurs say this is a condensed" decision "," uncertainty "," probability "," outcome "," sunk cost "," partnership "," insurance " , "Scatter", "Risk" and "Reward" courses, the image illustrates the importance of coordinating risk and reward with rationality and balance.

"Partnerships, insurance, and diversification are all ways to reduce risk. Although third-party insurance is not currently provided in domestic financial services, it can be understood as a" gambling agreement ", etc." Liu Xiaoren said.