Trésorier/Treasurer magazine - N°93 - Apr/May/Jun 2016 - (Page 53)

The Risk Observatory Solvay BS, ULB Hugues Pirotte Parallel to this discussion, the regulatory evolution, for example the impetus to increase the burden of MiFID rules on the appropriateness of the allocation against the risk profile of the client, looks like some sort of anachronism when compared to the evolution of the attitude towards risk. We are inclined to make sure risks are not taken beyond the level of In social and organisational psychology, there has been a substantial research on the attitude: is it linked to a general trait of the individual or is it situational? And the answer is: it depends... - APR "Risk tolerance, acceptance, aversion, appetite, seeking, propensity, excitement". Economists, mathematicians, financial engineers and psychologists, have contributed to this list. Bernoulli observed that people have decreasing marginal utility. In 1979, Kahneman & Tversky illustrated loss aversion through the asymmetry of perception towards losses vs gains of the same magnitude. This led to risk aversion in financial decision-making1 , a notion that many researchers have shown to be reduced when aggregating outcomes over longer periods and more asset classes. Although this notion is widely used and accepted, studies show that people may vary still a lot in risk propensity or the level of risk they are willing to occur. They might also be more "prevention-focused" rather than "promotion-focused" and vice versa2 . In the same line, Cordell (2001) proposes to separate investment risk tolerance into: propensity (risk behaviour in natural situations), attitude (willingness to incur risk as measured by the reaction to different scenarios), capacity (financial capability to bear risk), and knowledge (mainly of the no-free lunch principle between risk and return). N°93 This evolution of attitude is also perceivable in the judgment of the performance and governance of funds. In the past, we tended to sue fund managers for taking unreasonable risks with respect to the mission of the fund. Today, as for a recent example in Sweden, funds are judged for not taking enough risks. In particular, active funds whose target was to beat their benchmark have been discovered to share much of the same holding structure of passive ones, i.e. to show a very low "active share". Specialized press articles in continental Europe have recently been eyeing the high fees of passive funds versus those of active funds, on the basis of recent returns. This comparison is of course fallacious. First, the objective of passive investing is relative whilst the comparison is made on the basis of the absolute return (ex-post) performance. Second, it doesn't consider at all the effective level of risk accepted by "active" investors versus the risk of "passive" investors. Risk...what? - acceptance of the investor. But at the same time, the incentive to take risks is quite high, comparing to the last 20 years. Still, this incentive doesn't mean necessarily that all investors do actually take risks. The current environmental uncertainty and the load of regulatory rules imposed to banks as traditional intermediaries, keep retail clients storing non-invested cash and more professional investors flowing to funds out of the traditional distribution channels. LE MAGAZINE DU TRESORIER / TREASURER MAGAZINE In the 50s, Markowitz introduced the idea that investors might be confronted de facto to a cost-benefit function: a given level of expected return for a level of acceptable risk. Through the 80s, with risk-free rate levels around 12 to 16%, it was usual to hear the terms "risk tolerance" and "risk acceptance". Since the beginning of the 21st century, with rates close to infinitesimal or even negative values, "risk appetite" is now a frequent notion. Indeed, with a risk-free rate of 16% and still reasonable levels of inflation, you must be very hungry to take risk. At 0%, you want risk. / MAY / JUNE 2016 Bon (risk) appétit! 1. Corter & Chen (2005), "Do Investment Risk Tolerance Attitudes Predict Portfolio Risk?", Journal of Business and Psychology. 53

Table of Contents for the Digital Edition of Trésorier/Treasurer magazine - N°93 - Apr/May/Jun 2016

Cover
Table of contents
EDITORIAL
FINANCIAL HIGHLIGHTS Luxembourg Tax News
INTERVIEW David Blair - How should we set up an efficient KYC Process?
FOCUS
IFRS 9: Hedging - Treasurers will love it
From 17 to 16 reLEASE of the new LEASE accounting standard
Block chain - Is this buzz word turning into a reality?
Bank Single Gateway, the Plumbing of Bank Connectivity
FORUM
Geopolitical threats for the year ahead
Treasurers proceed with caution
Des difficultés en série pour les nouveaux entrants
Easing the Burden - Is a global KYC standard needed?
European trade repository of the year
La dette senior Européenne, un regard nouveau sur l'obligataire
CORPORATE FINANCE
Stay connected with cloud treasury technology
From stone age to straight through processing
Differentiators for treasury management systems
Complete securities financing solutions for corporates
A full and balanced "meal" for your retirement?
15 MINUTES WITH FinMetrics
THE FINANCIAL RISK OBSERVATORY
NEWS
LIFE BEYOND NUMBERS

Trésorier/Treasurer magazine - N°93 - Apr/May/Jun 2016