Financial Risks
Compared to the risks of scientific discovery, financial risks seem mundane. A banker would be concerned about a risk of total loss that is worth 10 basis points, or 0.1 percent. The R&D director of a pharmaceutical company knows that the chances of commercial success for a new molecule are from 10,000 to 1 to 100,000 to 1. The probabilities of success implied by these risks of total loss are 99.9 percent versus as little as 0.0001 percent. Because the chances of loss are much lower in relative terms, there is a mismatch in vocabulary and in processes among those managing the risk. But the absolute values at risk for the bankers may be very large (for example, billions of dollars of U.S. investments in the Far East), whereas those for the R&D director are relatively small—perhaps writing off a $100,000 project. In brief, R&D managers address risks that are often a thousandfold greater than those addressed by the bankers; the latter in turn deal with investments that are often a thousandfold larger than R&D investments.
The financial community has identified and dealt with a host of transactional risks and has appropriated the term risk management to encompass its methods. This term is unfortunate because it masks the ability to turn risk to economic advantage.