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Reform in the Financial Services Industry

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In ancient times, risk-taking cavemen lived with an abundance of food and risk-averse starved to death. In terms of financial theories and practice, the risk management is equating risks with hedging. Organizations prosper not by avoiding risks but by managing risks to their own advantage. Ancient trade across the continents flourished because of risk-taking and management. The key reason for Europe’s prosperity is risk management. In 1921, Frank Knight summarized the difference between risk and uncertainty with an example.
Two individuals drawing from an urn of red and black balls. the first individual is ignorant of the numbers of each color whereas the second individual is aware that there are three red balls for each black ball. The second individual estimates (correctly) the probability of drawing a red ball to be 75% but the first operates under the misperception (Knight 1921).
Holton (2004) explains two ingredients of risks: uncertainty and utility of the outcome. He explains that a man jumping out of a plane without a parachute is at no risk at all, because of the certainty of death. Risks provide opportunities for a good outcome out of a bad situation. If the reward outmatches the hazard of disaster, people are ready to take risks. If a firm is conscious of the risks it is undertaking, it is going to formulate strategies based on the decision.
The Institute of International Finance (December 2009) has defined risk culture as as the norms and traditions of behavior of individuals and of groups within an organization that determine the way in which they identify, understand, discuss, and act on the risks the organization confronts and the risks it takes (2009). It is essential that the risks are challenged by the core group of decision-makers with an objective to develop a spirit of nurturing buoyancy and inculcating an environment for continuous improvement, in line with the strategic aims of the organization.