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Risk Management, Optimal

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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.


  • Cognitive Bias
  • Global Financial Crisis
  • Credit Default Swap
  • Unfair Term
  • Reasonable Precaution

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Correspondence to Andrew Torre .

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Torre, A. (2016). Risk Management, Optimal. In: Marciano, A., Ramello, G. (eds) Encyclopedia of Law and Economics. Springer, New York, NY.

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Chapter History

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    Risk Management, Optimal
    23 September 2016


  2. Original

    Risk Management, Optimal
    04 September 2014