Encyclopedia of Law and Economics

2019 Edition
| Editors: Alain Marciano, Giovanni Battista Ramello

Risk Management, Optimal

  • Andrew TorreEmail author
Reference work entry
DOI: https://doi.org/10.1007/978-1-4614-7753-2_60

Abstract

Individuals continually confront a discrepancy between ever expanding and changing wants and the means that they have at their disposal, time, and income, to satisfy them. One of the consequences is the need to make constrained choices between alternatives that have uncertain outcomes. Risk is a different concept from uncertainty. Individual optimal risk management means reducing, eliminating, or fully bearing risk, after conducting a “cost-benefit” analysis. In practice, however, cognitive biases mean that many decisions are not economically rational, necessitating paternalistic government and judicial interventions. Systemic, or whole financial system collapse risk is, optimally managed using well-designed macroprudential regulatory tools. The source of this type of risk is the inherent dynamics of the financial system over the course of the business cycle, interacting with credit market negative externalities, often as in the case of the GFC, spawned by government regulatory failure.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.School of Accounting, Economics and FinanceDeakin UniversityMelbourneAustralia