Gresham’s Law of Risk Management

Those who do not see a risk will drive those who see the risk out of the market.

Gresham’s law is of course “bad money will drive out good.” Its application to risk can be stated as the above and is well known to many market participants even though they might not have named it. Many business managers will blame their lack of success in a market to fools who are inappropriately undercutting their price and losing money doing so. For the most part, in most markets, participants are price takers, not price makers.
If someone comes into a market and wants to take a risk at half the going rate, then there is a new going rate. Market participants who do see the risk can take the new going price or withdraw.

From this you can infer that there is no benefit to better modeling of risk if it results in a significantly higher value for the risk.  Simple techniques should be used to broadly size a risk to see if your view of the risk puts you near the market or not.  Then if you are near to the market, you can spend the time and money to more carefully evaluate the risk.

It makes no sense to spend lots of time an money carefully evaluating a risk that you will not be seeing because someone who is more optimistic, or someone who does not see that risk at all will be writing all of that business.

Explore posts in the same categories: Modeling, Risk, Risk and Light


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