Discussion 1 and 2 | risk management | Boston University

first discussion:

Consider the following article: L.1.P1.File 1.pdf That i have attached 

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Given the distinction between risk and uncertainty, what do you think happened to consumption demand by American households when plans/proposals for CARES Act 2020 passage were first announced, if we are to assume that:

  1. Households perceived the prospect of the passage of the CARES Act to be a risky event (they had some expectations of probability of the Act passage into law), as opposed to 
  2. Households perceived the prospect of the passage of the CARES Act to be an uncertain event (they formed no prior expectations of probability of the Act passage)?

Do you think households increased their consumption spending in anticipation of the Act passage under (1) above, or decreased their consumption spending in anticipation of the Act passage under (2)?

Note: we can think of increased consumption prior to Act passing as an event of households cashing-in on their advance insurance policy (income supports under the Act), while we can think of decreased consumption prior to Act passing as an event of households insuring themselves against income loss by ‘saving’ funds promised in the Act prior to its passage for future use.

Second discussion:

Two papers on CEO compensation structure and firm risks:

Minor, Dylan (2016), “Executive Compensation and Misconduct: Environmental Harm”, available at https://corporate-sustainability.org/wp-content/uploads/Executive-Compensation-and-Misconduct.pdf (Links to an external site.)

and

Chircop, Justin and Tarsalewska, Monika and Trzeciakiewicz, Agnieszka, (2020), “CEO Risk Taking Equity Incentives and Workplace Misconduct” (July 20, 2020), available at 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3511638

Note: in looking at these papers, please read papers’ Introduction and Conclusions sections. You do not need to read the specifics of econometric analysis and modeling, unless these are of interest to you, personally.

Both papers indicate that empirical evidence supports the proposition that CEO incentives materially impact firm-level operational risks, hazard risks and strategic risks. on the other hand, risk-taking incentives for CEOs are also seen by investors as tools for mitigating some financial risks (e.g. driving up longer term returns and increasing firm commitments to innovation and investment. Insurance providers often see the amelioration of financial risks as warranting reduction in overall insurance premiums charged on the firm, but ignore increases in strategic risks and operational risks. The reason for this is that financial rewards from increased risk-taking by the CEOs may arise on a different timing from the adverse risk impacts on operational and strategic risks. 

How does this evidence fit with the distinction between risk and uncertainty we discussed in the VUCA context?

Do you think longer term contractual relations between firms and their insurance providers can mitigate this problem of differential timings between financial gains and operational and strategic shocks?

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