Redefining Risk & Return: The Economic Red Phone Explained PDF
Preview Redefining Risk & Return: The Economic Red Phone Explained
REDEFINING RISK & RETURN The Economic Red Phone Explained Jesper Lyng Jensen Co-author: Susanne Sublett Redefining Risk & Return Jesper Lyng Jensen • Susanne Sublett Redefining Risk & Return The Economic Red Phone Explained Jesper Lyng Jensen Susanne Sublett Kirke Hyllinge, Denmark Hørve, Denmark ISBN 978-3-319-41368-6 ISBN 978-3-319-41369-3 (eBook) DOI 10.1007/978-3-319-41369-3 Library of Congress Control Number: 2016962052 © The Editor(s) (if applicable) and The Author(s) 2017 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover Design by Paileen Currie Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland It is extremely advantageous to be able to bring a number of investigations under the formula of a single problem. For in this manner, we not only facilitate our own labour, inasmuch as we define it clearly to ourselves, but also make it easier for others to decide whether we have done justice to our undertaking. Emmanuel Kant, 1781, Critique of Pure Reason Preface The journey from experiment to book has taken nine years. It has been an interesting journey, and it has been a privilege to receive the assistance of a great many fantastic people in the process. Claus Due Ponsaing and Jens B. A. Winther have been invaluable partners in the work of writing this book and the scientific publications. I owe both of you my deepest gratitude. Special thanks go to Niels Thygesen and Mogens Lykketoft for having admi- rably furthered the work of writing this book. You have opened many doors, participated in discussions, and frequently given your professional input. Many people have contributed to the writing of this book. During the five years I have taken to write the book, friends, family, and people from my network have helped with proofreading, commented on the contents, or put me in touch with people who were able to help in different ways, and I would like to thank them all. I should like to thank in particu- lar Susanne Sublett, Gitte Harbo Vanderhaegen, Thomas Iversen, Sune Kliborg Lynge, Mettelene Jellinggaard, and Christian Wichers. I should also like to thank Jan Als Johansen for his helpfulness and excellent linguistic consulting services. Finally, I should like to thank my family, Dorte, Asger, and Amanda, for being so patient with me and for believing in me over the years when I have worked on the book and the research during my spare time. vii viii Preface Jesper Lyng Jensen Holding Jesper Lyng Jensen Kirke Hyllinge, Denmark [email protected] IBM Susanne Sublett Hørve, Denmark [email protected] Contents 1 Introduction 1 2 How to Read a Monte Carlo Simulation Graph 9 3 Introduction to the Cost of Running Out of Capital 15 4 Risk and Uncertainty 19 5 The Cost of Running Out of Capital 29 6 Capital 53 7 Insurance 71 8 The Different Costs of Risk 95 9 Stock Taking 99 ix x Contents 10 Macroeconomics 107 11 Self-Chosen Risk and Government Intervention 127 12 The Top Ten Most Important Realisations Regarding Structural Risk 135 13 The Cost of Structural Risk Management in Liberalism 141 14 How Is This Book to Be Understood and What Kind of Society Does It Wish to Create? 147 Bibliography 151 Index 155 List of Figures Fig. 1.1 The book “Redefining Risk & Return” contributes to the description of economic risk, demonstrating how the theory fits in with a number of interfaces of the existing regimen of theories and with society. Accordingly, the book should be seen as an argument to support our claim that we have actually found an important, previously missing piece in our understanding of how risk is included in decisions to optimize conditions for social economic growth 5 Fig. 2.1 Graphical representation of a ten-sided die 11 Fig. 2.2 This graph shows the result of a Monte Carlo simulation of a 10% risk of a DKK 200,000 cost. The graph has two gray frequency columns. As can be seen, one is much taller than the other. The tall column is at the 0 point on the X-axis, while the short column is at the interval on the X-axis that goes from DKK 192,000 to DKK 200,000. The dotted graph is the accumulated probability graph. The dotted line is generated by taking the observations at a given value on the X-axis and dividing this figure by the number of all observations, while multiplying it by 100 to get the result as a percentage 12 Fig. 2.3 A Monte Carlo simulation of a risk owner’s risk situation as described in Table 2.1 A total of 5,000 simulations were made. The graph shows the result of these simulations in the form of the xi
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