27-01-2005 05:37									#481
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quote: Originally posted by Flubber Kontiki he can't-- the idea that there is a number on the analysis called risk cost is laughable. (unless he wants to go back to his previous use of the term referring to insurance premiums as a cost item) Risk is generally simple (if hard to quantify). You assess the probability of various outcomes and the results are quantified. management usually wants to know the p50-- most likely return, the bounds of likely outcomes say p99 and p01 and the risk weighted rate of return. all of this goes into the decision making process and can result in a project with a higher likely rate of return being rejected in favor of a lower return with less downside risk

Oh, I know all that - I have an MBA and work in the financial sector on project work. But apparently we don't assess risk like "normal" people.

	27-01-2005 05:39									#482
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quote: Originally posted by Kidicious Why do you guys make things so difficult. You can't not insure your factories and not take into consideration that eventually some factories will burn down. If you make $20M profit because you didn't buy insurance and instead took a risk sure you have made profit, but if you keep doing that eventually you will pay the price.

Are you still talking about insurance

If you buy it its a cost.

If you don't, any uninsured risk goes into the probable outcomes.


For bigger companies with hundreds of facilities it is obvious that not buying insurance will pay off in the long run on any typical claims experience over the years. But most companies insure for the catastrophe-- often with huge limits.

Governments do the same. They know that on average they will lose say 10 million on small disasters under a million each. the insurance companies know this too so the premium for that risk would be over 10 million (insurance company needs a profit plus a premium for the risk of the losses being much higher than average)


Finally -- for these big companies, existing coverages cover NEW operations-- so there is no additional cost for insurance on a new project

	27-01-2005 05:39									#483
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quote: Originally posted by Flubber Kontiki he can't-- the idea that there is a number on the analysis called risk cost is laughable.

That depends. Risk can be calculated. That's a prediction which won't be accurate, and won't have the same outcome, but you can calculate a risk cost. They do it all the time in the insurance industry.

	27-01-2005 05:43									#484
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Before we get into talking about the insurance industry, would you like to formally acknowledge that your equation is non-sensical?

	27-01-2005 05:43									#485
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quote: Originally posted by Kontiki Oh, I know all that - I have an MBA and work in the financial sector on project work. But apparently we don't assess risk like "normal" people.

I didn't know you had that experience. I'm working as legal counsel for a proposed 1.2 billion dollar project and most of the meetings and agreements we are doing are all about reducing risk-- But I guess the way international conglomerates do things , isn't normal.


Hell I am holding a risk assessment as we speak. Its only for a well though

	27-01-2005 05:46									#486
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quote: Originally posted by Kontiki I don't see how we're making this difficult - in fact, we're making it as simple as possible. But even going with what you've said above, why don't you tell us what the risk cost is and why you will eventually pay the price? Do all factories eventually burn down at some point or another? You built the equation, make it work!

risk cost = roughly the probability of loss times the potental loss. It's the actual loses that reduce profit, but you can't look at an income statement and see risk cost. However, there is always the cost of taking risks. If you don't take loses then there will be no costs.

	27-01-2005 05:48									#487
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quote: Originally posted by Kontiki No, the loss is reduced revenue, not an independent cost of risk.

So you lost money on your investment. I hope for your sake that you considered the costs of making that investment before you started counting your return.

	27-01-2005 05:50									#488
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quote: Originally posted by Kontiki Before we get into talking about the insurance industry, would you like to formally acknowledge that your equation is non-sensical?

You don't understand it obviously, which doesn't suprise me for the simple fact that I already have experience with you.

	27-01-2005 05:51									#489
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Keep at him kontiki.

IN another page or so he will be saying exactly what I was saying 4-5 pages ago. At that time he will lecture you on your stupidity for not acknowledging something obvious , usually something that you have stated repeatedly or something which a 7th grader would know.

What will happen is he will adopt a risk assessment methodology the same as we are talking about and claim that is what "risk cost" meant all along


@ kid-- already its very different that when you said "risk cost" meant insurance premiums and even cited an article and questioned my literacy

	27-01-2005 05:52									#490
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quote: Originally posted by Kidicious risk cost = roughly the probability of loss times the potental loss. It's the actual loses that reduce profit, but you can't look at an income statement and see risk cost. However, there is always the cost of taking risks. If you don't take loses then there will be no costs.

That's nice. Put it into your equation and explain how you can "double dip" with a loss in revenue and have a seperate risk cost.

	27-01-2005 05:53									#491
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quote: Originally posted by Kidicious You don't understand it obviously, which doesn't suprise me for the simple fact that I already have experience with you.

I guess I don't, and you offered to explain it, so show me a working example.

	27-01-2005 05:54									#492
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Here you go Kontiki. Say you plan to build 4 factories. You calculate the risk of fire to any one factory to be .25 so that means you can expect that one factory will burn. Before you build the factories you calculate the loss of one factory into your profit forcasts. But no factories burn. So the loss was not realized but there always was a risk cost.

	27-01-2005 05:56									#493
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quote: Originally posted by Kidicious So you lost money on your investment. I hope for your sake that you considered the costs of making that investment before you started counting your return.

Why wouldn't I? That has nothing to do with whether or not there is a risk cost. I don't lose money in the form a risk cost on top of my investment.

	27-01-2005 05:56									#494
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quote: Originally posted by Kontiki That's nice. Put it into your equation and explain how you can "double dip" with a loss in revenue and have a seperate risk cost.

If you want to predict revenue without considering the risk of loss feel free Kontiki. The actual revenue will not have a risk cost. It will have losses, or maybe not. That doesn't mean that there was never a risk cost.

	27-01-2005 05:57									#495
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quote: Originally posted by Kontiki Why wouldn't I? That has nothing to do with whether or not there is a risk cost. I don't lose money in the form a risk cost on top of my investment.

If you lose that loss is the cost of taking a risk. Try not to respond to that without addressing it at all like you usually do.

	27-01-2005 05:59									#496
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quote: Originally posted by Kidicious Here you go Kontiki. Say you plan to build 4 factories. You calculate the risk of fire to any one factory to be .25 so that means you can expect that one factory will burn. Before you build the factories you calculate the loss of one factory into your profit forcasts. But no factories burn. So the loss was not realized but there always was a risk cost.

That doesn't make any sense in your equation, though. If I can expect one of my factories to burn, I can expect to have lower revenue than if none of them burned. So my revenue forecast already takes that into consideration. Why would I add a risk cost on top of that? Alternatively, why would I forecast my revenue to be unaffected by fire if I expect one of my factories to burn?

	27-01-2005 06:03									#497
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quote: Originally posted by Kontiki That doesn't make any sense in your equation, though. If I can expect one of my factories to burn, I can expect to have lower revenue than if none of them burned. So my revenue forecast already takes that into consideration. Why would I add a risk cost on top of that? Alternatively, why would I forecast my revenue to be unaffected by fire if I expect one of my factories to burn?

The equation is not an equation used in business. Again, I'm trying to explain something that is very simple. Give me a break here. If you've taken the risk of loss into consideration when you forcasted your revenue then you have in fact considered the cost of risk.

	27-01-2005 06:06									#498
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quote: Originally posted by Kidicious If you want to predict revenue without considering the risk of loss feel free Kontiki. The actual revenue will not have a risk cost. It will have losses, or maybe not. That doesn't mean that there was never a risk cost.

Who said you would predict revenue without considering the risk of loss? Your predicition of revenue should already consider the risk of loss, not assume it doesn't exist and then build it in later. Otherwise you're falsely predicting revenue.

	27-01-2005 06:10									#499
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quote: Originally posted by Kontiki Who said you would predict revenue without considering the risk of loss? Your predicition of revenue should already consider the risk of loss, not assume it doesn't exist and then build it in later. Otherwise you're falsely predicting revenue.

I don't know why you are arguing. You don't like my formula fine. I didn't claim that it was a law. I was using it as a teaching aid, because you guys seems to not know anyting about the relationship between risk cost and profit. It seems that you do, so I really don't know what your purposes are. Do you want to argue that profit is a premium for taking risk? Go for it.

	27-01-2005 06:32									#500
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Kid

quote: You lost me. I'm not changing my argument that I know of. All economists believe that poorly run businesses should generally be allowed to fail.

You said some libertarians believe that poorly run businesses should be allowed to fail and the implication was that this somehow discredits libertarianism. Now all economists share this belief with libertarians? Fine, so how is your assertion that some libertarians believe poorly run businesses should be allowed to fail relevant? Not all economists believe that btw, some believe selected businesses that show themselves poorly run by their loss of marketshare to competitors should still be propped up if need be for other reasons inspite of the inefficiency.

quote: The difference is that some believe that resources will not, and should not be used, and other believe that resources should always be used, and will always be used, save for govt intervention.

What does this have to do with what you said?

quote: I didn't change the context. People perish when they have no means for survival. Isn't that a recession?

You did change the context, the word "recession" was no where in your post. Explain to me why it is wrong (or whatever negative connotation you were implying) to believe poorly run businesses should be allowed to fail.

quote: The producers themselves are not superior to the inefficient producers. They just have some lower costs because of geography and or access to resources.

And given "equal" access to resources all businesses will be equally efficient?

	27-01-2005 07:11									#501
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Die thread!

	27-01-2005 07:54									#502
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quote: Originally posted by Berzerker Kid You said some libertarians believe that poorly run businesses should be allowed to fail and the implication was that this somehow discredits libertarianism.

No it doesn't. It shows that libertarianism is compatable with natural selection. If this isn't so than show me in some document were libertarianism is incompatable with the idea that the weak should be allowed to perish, and that the govt should not intervene in the natural progress of society.

quote: Now all economists share this belief with libertarians?

Um. No. Not necessarily. We're talking about mainstream economist and another school which is compatable with libertarian beliefs.

quote: Fine, so how is your assertion that some libertarians believe poorly run businesses should be allowed to fail relevant? Not all economists believe that btw, some believe selected businesses that show themselves poorly run by their loss of marketshare to competitors should still be propped up if need be for other reasons inspite of the inefficiency.

Because that is the aspect that is similar to natural selection. The strong survive and the weak perish.

quote: What does this have to do with what you said?

You may not believe that there is a natural way of companies and workers being eliminated when they are not productive, but there are some libertarians who do. They believe that the govt should not provide welfare, not because it is just a violation of rights, but because it maintains inefficiencies.

quote: You did change the context, the word "recession" was no where in your post. Explain to me why it is wrong (or whatever negative connotation you were implying) to believe poorly run businesses should be allowed to fail.

I don't necessarily believe for one that a company fails because it is poorly run. The companies fail for example because there is a recession.

quote: And given "equal" access to resources all businesses will be equally efficient?

An assumption that neoclassical economists use is that all firms can aquire any resources that they need. Don't blame me for that assumption. Obviously scarcity provides that they do not.

	27-01-2005 08:33									#503
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Kid

quote: No it doesn't. It shows that libertarianism is compatable with natural selection. If this isn't so than show me in some document were libertarianism is incompatable with the idea that the weak should be allowed to perish, and that the govt should not intervene in the natural progress of society.

Libertariansim is based on freedom, survival of the fittest is not. Under communism the strong will and do literally kill off the competition so communism can survive. Now there's a similarity...

quote: Um. No. Not necessarily. We're talking about mainstream economist and another school which is compatable with libertarian beliefs.

You just said ALL economists agree failing businesses should be allowed to fail, I pointed out why you are wrong.

quote: Because that is the aspect that is similar to natural selection. The strong survive and the weak perish.

The last time you said that I asked you to explain the survival of babies. Comparing surivial of the fittest to a business failing because of inefficiency is Kidiculous. I said survival of the fittest includes killing the competition and I'm still waiting for you to refute that after claiming I was wrong.

quote: You may not believe that there is a natural way of companies and workers being eliminated when they are not productive, but there are some libertarians who do.

"Killed" or put out of business? You seem to equate the two, I don't.

quote: They believe that the govt should not provide welfare, not because it is just a violation of rights, but because it maintains inefficiencies.

Geez Kid, you just keep changing the subject when you can't support your past assertions. Does this "right" to welfare now refer to business subsidies to keep wasteful businesses afloat?

quote: I don't necessarily believe for one that a company fails because it is poorly run. The companies fail for example because there is a recession.

It doesn't matter why you think a business fails, you didn't mention recession until very recently, i.e., you changed the context.

quote: An assumption that neoclassical economists use is that all firms can aquire any resources that they need. Don't blame me for that assumption. Obviously scarcity provides that they do not.

You can't even answer that question? I'll ask it again:

quote: And given "equal" access to resources all businesses will be equally efficient?

So what is it?

	27-01-2005 08:37									#504
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quote: Originally posted by Kidicious Here you go Kontiki. Say you plan to build 4 factories. You calculate the risk of fire to any one factory to be .25 so that means you can expect that one factory will burn. Before you build the factories you calculate the loss of one factory into your profit forcasts. But no factories burn. So the loss was not realized but there always was a risk cost.

bull. The probability of losing factories appear to have probabilities approximately as follows

zero ==31.6%
one 42.2%
two 21.1 %
three 4.68%
four less than one percent


You calculate all of this into a weighted risk assessment including revenues lost in each scenario. The reality is that the almost 25% chance of losing two of more factories will likely result in a risk weighted rate of return that is unacceptable if not less than zero. But its possible this project would happen if the projected profits in the zero or one loss scenarios were big enough and say the two factory loss scenario was break even or even a small loss. But its far more complex than a risk cost number and this was a simple example with only one variable.

There is no number of risk cost in dollars that gets added. Its simply not how it is done. Reality is you usually have dozens of variables with contingent costs and contingent revenues leading to hundreds of possible outcomes. In the end you come up with an analysis that might say

1% chance of 80% return or more
1% chance of 25% to 80 %
48% chance of 20 to 25%
40% chance of 15 to 20 %
5% chance of 0 to 15%
4% chance of 0 to negative 200%
0.5% chance of negative 200% to negative 500%
0.5% chance of in excess of negative 500%

This is obciously simplified and is usually represented better graphically as that can show any spikes or blips in the projections

Note that I could have done an example where there is ZERO chance of loss and you still do the same assessment. WHY?? because you would have to assess the investment looking at the projected rates of return-- If they don't meet your threshold you don't do the project

	27-01-2005 08:46									#505
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@ Berz

I don't even know how our conversations get off on such tangents. If libertarianism in not compatable with Social Darwinisn then show me a document. I won't accept that you simply say that libertarians believe in freedom. A lot of parties believe in what they call freedom.

	27-01-2005 08:51									#506
	Remove this text

quote: Originally posted by Flubber bull. The probability of losing factories appear to have probabilities approximately as follows zero ==31.6% one 42.2% two 21.1 % three 4.68% four less than one percent You calculate all of this into a weighted risk assessment including revenues lost in each scenario. The reality is that the almost 25% chance of losing two of more factories will likely result in a risk weighted rate of return that is unacceptable if not less than zero. But its possible this project would happen if the projected profits in the zero or one loss scenarios were big enough and say the two factory loss scenario was break even or even a small loss. But its far more complex than a risk cost number and this was a simple example with only one variable. There is no number of risk cost in dollars that gets added. Its simply not how it is done. Reality is you usually have dozens of variables with contingent costs and contingent revenues leading to hundreds of possible outcomes. In the end you come up with an analysis that might say 1% chance of 80% return or more 1% chance of 25% to 80 % 48% chance of 20 to 25% 40% chance of 15 to 20 % 5% chance of 0 to 15% 4% chance of 0 to negative 200% 0.5% chance of negative 200% to negative 500% 0.5% chance of in excess of negative 500% This is obciously simplified and is usually represented better graphically as that can show any spikes or blips in the projections Note that I could have done an example where there is ZERO chance of loss and you still do the same assessment. WHY?? because you would have to assess the investment looking at the projected rates of return-- If they don't meet your threshold you don't do the project

Interesting, and I mean that. It still doesn't dispute the fact that the basic way to decide about undertaking a project is to examine the forcasted risk and return. You pursue the project if the return outways the risk. They profit that you make if you are successfull it over and above the risk. So I like your figures here, but I'm just wondering if you still disagree with my general assessment.

	27-01-2005 09:01									#507
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Kid

quote: I don't even know how our conversations get off on such tangents.

I do Odin said libertarianism is based on social Darwinism and you "defended" his assertion from my rebuttal.

quote: If libertarianism in not compatable with Social Darwinisn then show me a document.

Show me a communist document that proves communism and social Darwinism are incompatable. I've already explained why libertarianism is incompatable with social Darwinism, libertarians believe in freedom and freedom is incompatable with social Darwinism. Should the people who devise the libertarian philosophy also mention that btw, freedom is incompatable with social Darwinism?

quote: I won't accept that you simply say that libertarians believe in freedom. A lot of parties believe in what they call freedom.

Are they right? Just because a fascist claims to believe in freedom doesn't mean others making the same claim are full of it. We can compare the definition of freedom with their actions and stated beliefs to see if they are full of it... Would you like to show why libertariansim violates the actual definition of freedom or is your "proof" the fact some people falsely claim to believe in freedom?

Are you going to answer me? Here it is once again:

quote: And given "equal" access to resources all businesses will be equally efficient?

You said businesses fail because of unequal access to resources and geography, equalise these two and explain why businesses are all equally efficient, please.

	27-01-2005 09:09									#508
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quote: Originally posted by Berzerker Kid I do Odin said libertarianism is based on social Darwinism and you "defended" his assertion from my rebuttal.

I didn't really intend to defend his assertion. So maybe I shouldn't have made any comment. I don't think it's 'based' on it. I merely mean that it's compatable with it. I don't know of any reason why a person couldn't be both, and you only say because you believe in freedom. As far as I know social darwinism really isn't against any freedoms that you are. In is not necessary for a Social Darwinist to believe in killing.

	27-01-2005 09:12									#509
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quote: Originally posted by Berzerker You said businesses fail because of unequal access to resources and geography, equalise these two and explain why businesses are all equally efficient, please.

Well this is one of those tangents. I was talking about someone elses ideology. I don't want you to think I'm defending it. :P

	27-01-2005 10:11									#510
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quote: As far as I know social darwinism really isn't against any freedoms that you are.

The freedom to exist? Social Darwinism is based on survival of the fittest, and thats based on kill, be killed, or run like hell. The Nazis "justified" killing all sorts of people based on a belief in their superiority and killing undesirables strengthened society.

quote: In is not necessary for a Social Darwinist to believe in killing.

True, thats just the logical conclusion given how it derives from survival of the fittest in the animal world.