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16 - Whose risk counts?

Published online by Cambridge University Press:  05 April 2014

By
Raj Thamotheram  and
Aidan Ward
Edited by
James P. Hawley ,
Andreas G. F. Hoepner ,
Keith L. Johnson ,
Joakim Sandberg  and
Edward J. Waitzer
Raj Thamotheram
Affiliation:
Network for Sustainable Financial Markets
Aidan Ward
Affiliation:
Organizational Systems Consultant
James P. Hawley
Affiliation:
St Mary's College, California
Andreas G. F. Hoepner
Affiliation:
ICMA Centre, Henley Business School, University of Reading
Keith L. Johnson
Affiliation:
University of Wisconsin, Madison
Joakim Sandberg
Affiliation:
University of Gothenburg
Edward J. Waitzer
Affiliation:
York University, Toronto
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Summary

In the expectations market the goal is to make a trade in which you have the upper hand, no matter what the impact is on the other party.

Roger Martin (2011: 32)

Of all imaginary organisms – dragons, gods, sea monsters … – economic man is the dullest.

Gregory Bateson (1987: 175)

This makes investors focus on returns without paying sufficient regard to the risks that are being taken to achieve these returns. Rarely do funds make their principal focus risk-adjusted return.

(Towers Watson 2012: 13)

Introduction

The title of this chapter points to a deep unease the authors have about the workings of the investment industry. In an industry where the size of one’s “risk appetite” is a marker of one’s virility, where the biggest brains are drawn to interpreting the subtleties of the movements of markets, the dominant belief is that it is right that outsized financial rewards should go to those who deliver alpha (and clients). Our hypothesis is that, in this context, some simple and common sense truths about risk are ignored.

Here are some generalizations about the investment industry. In an industry where herd behavior is prevalent, the exceptions validate these norms.

Type
Chapter
Information
Cambridge Handbook of Institutional Investment and Fiduciary Duty , pp. 207 - 221
Publisher: Cambridge University Press
Print publication year: 2014

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