Course Description

Risk management is a process that begins with identification of risks and opportunities the firm faces. Students will learn different methods for risk identification, and their strengths and weaknesses. Risk identification is extremely important since firms are often unaware of the risks they face as the examples from Delta and BP illustrate. After risks are identified, the next step is to measure the risk. Students will learn how to measure possible outcomes and the likelihood of each outcome. After the risk is measured, the risk officer can make a decision about how much risk mitigation to undertake. Some risks are worth taking and it is impossible to eliminate all risk. Students will learn how to mitigate risk and how to decide which risk mitigation activities are worthwhile. Finally, the risk management process continues by monitoring the risk, which may change over time.

The course will focus on enterprise risk management, which considers how risks affect the entire enterprise. A negative outcome in one division of the firm is often a positive outcome in another. Conversely, some risks to individual parts of the firm magnify each other, creating an enterprise risk that is greater than the sum of the individual risks. Students will learn how to aggregate risk across the enterprise.

Finally, risk management integrates with the firm's sustainability program. This course will focus especially on climate risk and sustainability-related risks more generally, such as the risk of environmental accidents, risk of accidental non-compliance with environmental regulations, reputation risks arising from poor sustainability policies (e.g. not taking steps to ensure safe working conditions across the supply chain), and more. Becoming more sustainable mitigates these risks. Reduction in risk mitigating costs such as insurance is an additional benefit to becoming more sustainable.

General Information

Course Meetings: Section 35: Monday and Wednesday from 1:45-4:00 pm in room Aresty 431.

Office: Room 517G, Jenkins School of Business.

Office hours: Tuesdays from 1-3 pm, room TBA.

Contacts: Dave can be contacted via phone (8x3725) or email (dkelly@miami.edu).

Web Site: All notes, homeworks, reviews, quizzes, and solution sets and the syllabus will be posted on Canvas. The syllabus is also available on Dave's website (http://moya.bus.miami.edu/~dkelly/teach/eco617/index.html)

Final Exam: Wednesday April 29, 1:45-4 pm in Aresty 431.

Prerequisites

Textbooks

Unfortunately, it has proven very difficult to find a textbook for risk management that properly incorporates sustainability concepts. So the course will be notes based. I will give sources for background reading as we go along.

Grades

• 3 Homeworks 25% (due dates: March 25, April 8, April 22)
• First Quiz (April 1) 25%
• Second Quiz (April 15) 25%
• Final Quiz (April 29) 25%

Additional Notes

• Attendence is required and very important for this class. All quiz material comes from class notes, and many in class problems are only available in class. Dave will provide detailed notes. But smart students will attend every class and take detailed notes on the in-class examples, and will therefore find that the homeworks and quizzes are straightforward. Of course, if you are sick or experiencing Covid like symptoms, please stay home.
• There is a homework or quiz due every Wednesday. Each homework is worth 8.3%, about a letter grade. Dave prefers homeworks to be submitted via email, but in person is OK too. If submitting by email, please submit a Word Document or pdf, avoid huge jpeg/picture files. The homework email must be sent (or handed in) by the time class starts. Dave recognizes that sometimes emergencies occur, in which case a student can be excused from turning in a homework. In this case, the final will be weighted more. Students must let Dave know in advance if they are unable to turn in a homework on time. Finally, the homeworks sometimes demonstrate how the concepts used in class are applied in the "real world." Because the real world is complicated, the homeworks can be long. Do not wait until the last minute to start the homeworks.
• The three quizzes are April 1, Apri 15, and April 29. Now is the time to mark your calandars. As with the homeworks, if there is an emergency or you are experiencing Covid symptoms and cannot take the quiz, the final will be weighted more. Students must let me know in advance of the quiz start time if there is an emergency.
• With six week courses, it is important to keep up. Missing one class is equivalent to missing a week's worth of undergraduate classes.
• What they say about Dave on Rate My Professor:
  • "Can be an a-- if you procrastinate."
  • "God help you if you don't go to class."

Course Outline

1. Introduction (March 16-18).
1. Risk and Risk Management
1. Risk
2. Randomness versus uncertainty.
3. What is risk management?
4. What is enterprise risk management?
2. Sustainable Business and Risk Management
3. Information
1. Knowns and unknowns.
2. Sustainability and information.
4. Risk identification.
1. Surveys and polls.
2. Internal meetings.
3. Expert opinion.
4. Audits.
5. Risk measurement.
6. Risk mitigation.
7. Risk monitoring.
2. Risk identification (March 18-25).
1. Surveys.
1. Objectives.
2. Long and short run risk.
3. Who to survey?
4. Risk information.
5. Risk categories.
2. Internal meetings.
1. Information cascades.
2. Imitation bias.
3. Incentive bias.
3. Expert opinion.
1. Optimistic bias.
2. Incentive bias.
4. Audits.
5. Materiality Assessments.
1. Materiality vs Risk.
2. Assessing materiality using surveys.
3. Risk Measurement (March 25 - April 8).
1. Basic framework.
1. Signals.
2. Information events.
3. HOMEWORK 1 DUE MARCH 25.
2. Units of measurement.
1. Variance.
2. Value at risk.
3. Black swan and fat tailed risk measurement.
4. Risk measures important for sustainability.
5. Enterprise risk measurement.
3. Past Data.
1. Assumptions under which past data estimates risk.
2. Independence and stationarity.
3. Strengths and weaknesses of past data.
4. Polling and surveys.
1. Theory.
2. Practical issues.
5. Expert opinion.
1. Theory.
2. Biases.
3. Herding.
4. Bayes Rule.
5. Information cascades.
6. FIRST QUIZ, April 1.
6. Climate Risk Modeling
1. Theory.
2. Transition Risk.
3. Physical Risk.
7. Securities markets.
1. Risk information and securities prices.
2. Belief updates.
3. Risk information and trading data.
4. Risk averse traders.
8. Prediction markets.
1. Risk information and prediction markets.
2. Manipulation.
3. Image problems.
4. Performance.
5. HOMEWORK 2, DUE APRIL 8.
4. Risk Mitigation (April 13 - April 22).
1. Principles.
2. Manager risk vs shareholder risk vs firm risk.
3. SECOND QUIZ, April 15.
4. Tools.
1. Adaptations and resilience.
2. Hedging.
3. Insurance.
4. Sustainability favors adaptations.
5. Marginal cost of risk mitigation.
6. Marginal benefit of risk mitigation.
7. Employee response to risk mitigation
8. HOMEWORK 3 DUE APRIL 22.
5. Risk monitoring (April 22).

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