Risk of the Jungle

Risk management is a quantitative field with specific techniques. A business developer wants to optimize market risk. What does that mean in concrete?

I borrow a metaphor of Aaron Brown's great book: Red-Blooded Risk:

Value at Risk of the Jungle - don't let the leopards and mambas in

VaR is a statical technique to quantify the level of a financial risk of a "financial project" over a specific time frame. It quantifies the amount of potential loss, a probability of that amount and the time frame. A 95%, 1 month VaR of 100 means: there's a 5% chance that the project creates a loss of more then 100 during any given month. The % "Confidence" and time shall reflect your business characteristics. VaR is usually calculated by virtually trade a "product" across historic or market behavior scenarios.

VaR is like a fence built around a village in the jungle. The fence is built in a relatively safe place, and remaining dangers inside are cleared out. But people spend, say, 5% of their time outside the fence where dangers are greater and less known.

People grow, breed and produce food, craft things...inside, but some times they want to go out, select raw materials, hunt and trade. For the village people dangers and opportunities come from nature and they have only the ability to control them inside the fence.

But uncertainty is not risk

You can bet on a five possible outcomes of of a dice throw. It's still uncertain, but there's only low risk.

So, there's a chance to even take risk outside the fence. This is for example easier if there are other villages around - they could jointly study the behavior of the animals, arrange exchanges with high utility…organize shared production…erect safe trading places…

So, what I've roughly described here are two of the risk principles:
Duality - the known and the unknown 
Boundary - in 95 of 100 days, life and business of the village people is normal…they can optimize risk quantitatively. But people can also take risk outside the fence..
On the long run the village people will gain from explorative learning, evolutionary approaches and optionality.

They hopefully remain risk takers but not blind.

To innovate is risky - because you make something new...for new markets. You don't have too much data to quantify your risk spectra. But you still have measures for risk "optimization"…options to name one.