Corporations and financial institutions have recently created a strange position called Risk Managers, someone who is supposed to monitor the institution’s businesses and make sure that it is not too deeply involved in the business of playing Russian roulette. Clearly having been burned a few times, someone is to take a look at the generator, the machine that produces the profits and losses. The risk managers’ job, however, feels awfully strange. As we know, the generator of reality is not observable.
They are limited in their power, with their arsenals of policies and regulations, to limit profitable traders from taking risks given that they would ex-posts be accused by the shareholders of costing the institution great opportunities. On the other hand, the occurrence of a blow up would cause many fingers to be pointed at them. What to do? The point is to play politics; issuing memoranda and policies that neither actually promote nor condemn a risk taking activity. Their policies must include a margin of error.