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The Doom Loop in the Financial Sector

And Other Black Holes of Risk

William Leiss

Publication Year: 2010

In the past two years, the world has experienced how unsound economic practices can disrupt global economic and social order. Today’s volatile global financial situation highlights the importance of managing risk and the consequences of poor decision making. The Doom Loop in the Financial Sector reveals an underlying paradox of risk management: the better we become at assessing risks, the more we feel comfortable taking them. Using the current financial crisis as a case study, renowned risk expert William Leiss engages with the new concept of “black hole risk” — risk so great that estimating the potential downsides is impossible. His risk-centred analysis of the lead-up to the crisis reveals the practices that brought it about and how it became common practice to use limited risk assessments as a justification to gamble huge sums of money on unsound economic policies. In order to limit future catastrophes, Leiss recommends international cooperation to manage black hole risks. He believes that, failing this, humanity could be susceptible to a dangerous nexus of global disasters that would threaten human civilization as we know it.

Published by: University of Ottawa Press

Cover Art

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Frontmatter

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Contents

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pp. vii-viii

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Preface

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pp. ix-xv

The custodians of the Grand Library of Baghdad, one of the glories of the civilized world in the 13th century, might be forgiven for not having anticipated the day in 1258 when a band of horsemen from Mongolia consigned the entire collection to the waters of the Tigris, which, it is said, ran black with the ink leached ...

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Acknowledgements

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pp. xvi-xix

My academic base is provided by the McLaughlin Centre for Population Health Risk Assessment at the University of Ottawa. I am very grateful to the director of the centre, Professor Dan Krewski, for his support and encouragement of my research and writing since I became affiliated with it in 2001. ...

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Chapter 1 Black Holes of Risk

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pp. 1-20

Two important ideas are contained in the passage quoted above. First, in the process of seeking to control the risks that we recognize and understand—risks that are well described using formal techniques developed in the field of risk management—we should be aware of the possibility that, in this very process, ...

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Chapter 2 Systemic and Super-Systemic Risk in the Financial Sector

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pp. 21-107

As a hectic series of meetings unfolded over a single weekend at the offices of the Federal Reserve Bank of New York in Manhattan in mid-September 2008, the core of the world’s banking system teetered on the brink of a complete meltdown. The blow-by-blow account of these meetings, and the months leading up to them, ...

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Chapter 3 Controlling the Downside Risk

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pp. 108-136

Risk is conventionally defined as “the chance of harm,” but an additional proviso is important: in all forms of deliberate risktaking—whether playing sports, undergoing a medical procedure or starting a business—risk is the chance of harm that is assumed in pursuit of some desired net benefit. ...

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Appendix 1 Fragility in Complex Systems and the “Tipping Point” Problem

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pp. 137-144

In a speech delivered in April 2009, Andrew G. Haldane reiterated and amplified the “robust yet fragile” theme, presenting it as a characteristic of many complex adaptive systems, such as tropical rainforests, and also adding some additional descriptive metaphors (Haldane 2009b, 9–10): ...

Appendix 2 A Basic Integrated Risk Management Frameworks

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pp. 145-147

Works Cited

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pp. 148-157

Index

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pp. 158-169


E-ISBN-13: 9780776619286
E-ISBN-10: 0776619284
Print-ISBN-13: 9780776607382
Print-ISBN-10: 0776607383

Page Count: 190
Publication Year: 2010

Series Title: Critical Issues in Risk Management