Redefining Risk & Return (eBook)

Jesper Lyng Jensen is a risk professional with a broad range of experience in high risk industries such as Pharmaceutical R&D, Construction Mega Projects, and Oil & Gas Exploration and Production. Jesper also spent 6 years as consultant and independent risk researcher, which is also his current occupation. Susanne Sublett graduated from Copenhagen Business School (CBS), Denmark, with a master’s degree in Economics. Having spent many years working in France in the wine industry, rising to the position of CFO, she returned to Denmark to begin a career in the credit risk industry. Today, Susanne works as a lead financial advisor in the global finance department of a major international IT company.

Preface 6
Contents 8
List of Figures 10
List of Tables 15
List of Formula 16
1: Introduction 17
What Is the Financing Cost of Suddenly Running Out of Capital? 22
2: How to Read a Monte Carlo Simulation Graph 24
3: Introduction to the Cost of Running Out of Capital 30
A Risk Owner and a Structure 31
4: Risk and Uncertainty 34
The Concept of Risk 34
The Description of Risk and Uncertainty 35
Correlated Risks 38
How Do We Process Risk? 39
People, Risk, and Uncertainty 40
5: The Cost of Running Out of Capital 44
Experiments and the Limitations of Literature 44
The Red Phone 48
Structural Risk Cost 51
Structural Risk 52
The Loss if a Red Phone Call Is Not Answered 52
Cost Syndrome 55
Overview of Structural Risk 57
Who Are Risk Owners? 58
The Risk Owner’s Perspective on Risk 59
Hidden Cost That Hampers Growth in Society 64
6: Capital 67
Relations Between Risk and Return 71
Bowman’s Paradox 74
Financial Stress Testing 75
Ineffective Return on Reserves 81
Final Points Concerning Capital 83
7: Insurance 84
The Historical Importance of Insurance 84
Insurance as Protection Against Red Phone Situations 85
Defective Insurance 90
The Anti-Social Risk Cost That Can Be Removed as It Occurs 94
Health Insurance 96
Tax-Paid Insurance 100
Moral Hazard 101
Final Observations Regarding Insurance 107
8: The Different Costs of Risk 108
9: Stock Taking 111
10: Macroeconomics 118
Equilibrium 118
The Formula for Society’s Structural Risk Cost 120
Factors in the Formula for Society’s Structural Risk Cost 122
Natural Disasters 123
Illness 123
Crime 124
The Police and the Judicial System 124
Corruption 125
Dental Care 125
Accidents and Injuries 126
Crises and Macroeconomics 126
Conditions on the Labour Market 127
The Financial Factors Included in the Formula of Society’s Structural Risk Cost 128
Perspectives on the Use of the Formula for Society’s Structural Risk Cost 129
Keynes’ Savings Paradox 129
Tax Relief 130
Equality 131
Displacement of Equilibrium 135
11: Self-Chosen Risk and Government Intervention 137
The Future and Structural Risk Cost 141
12: The Top Ten Most Important Realisations Regarding Structural Risk 145
The Cost of Risk Is Different, Depending on Who Owns It 145
Reserve Capital Generates a Higher Return than Savings 146
Bowman’s Paradox Is Not a Paradox 146
Insurance Can Improve the Return on an Investment 147
The Structural Risk Cost Is Destructive and Harmful to Society 147
The Structural Risk Cost Can Be Removed After the Risk Event Has Occurred 148
Keynes’ Savings Paradox Is Not a Paradox 148
A Purely Market-Driven Insurance System Is Not Necessarily Ideal 149
The State Can Increase Societal Growth by Removing Risks for Risk Owners 149
Long-Term Growth Is Not Just a Matter of Stimulating Consumption 150
13: The Cost of Structural Risk Management in Liberalism 151
14: How Is This Book to Be Understood and What Kind of Society Does It Wish to Create? 157
Bibliography 161
Index 164