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Risky business

With risk management in the spotlight, the Kellogg School’s Zell Center for Risk Research prepares students to serve as leaders in the field

By Amy Trang

7/9/2009 - Russell Walker likes to tell his students this tale about the "first risk manager."

Long ago, a farmer wanted to plant some seeds, but lacked the means to buy them. He asked a wealthier farmer if he could borrow some seeds in exchange for a portion of the future crop. But before agreeing to the deal, the prospective lender asked to see the borrower's land, peppered him with questions about his expertise and looked at the neighboring farms.

"In the end, the wealthier farmer might agree to the deal, and might even ask for a bonus seed repayment to account for the risk posed by the borrowing farmer," says Walker, assistant director of the Zell Center for Risk Research and a senior lecturer of managerial economics and decision sciences at the Kellogg School. "That is risk management at work."

The tale may be apocryphal, but it illustrates a fundamental truth. Risk management, at its core, is the gathering of information to reduce uncertainty, and making a decision based on that information.

It is a discipline that is gaining renewed attention in the wake of the economic meltdown. And it is a skill that entrepreneur Sam Zell long believed should receive more emphasis in management education. Nearly a decade ago, Zell founded the Zell Center for Risk Research at the Kellogg School with the goal of improving how risk management is taught and regarded.

"Many of the problems the world is experiencing right now [stem from] underestimating risk," Zell says. "My philosophy has always been to get as close as you can to identifying the downside, and if you can live with the downside, you have quantified your risk and are able to go forward."

Indeed, risk management — or lack thereof — is now in the spotlight, as the ongoing economic crisis has exposed many firms' poor handling of risk. Last September, CFO magazine's sponsored research group, CFO Research Services, surveyed chief financial officers and other senior finance executives from a range of industries in the United States. Sixty-two percent of respondents blamed risk management practices at banks as a chief contributor to the current financial crisis, while 72 percent said they were more concerned about their firms' risk management practices than other financial issues at the firms.

With more than half reporting that their companies are likely to change their risk management practices, MBAs with top-flight skills in risk management are likely to find themselves increasingly in demand. In fact, in a Sept. 15, 2008 article, "Meltdown Means Opportunity for Risk Managers," CFO reported that big consumer companies are looking for managers to help them manage interest rate and currency risk and that "corporations are especially interested in … MBAs in finance, usually from top-20 schools."

"For far too long, risk managers were viewed as the 'risk police' and were ignored," says Robert Korajczyk, the Zell Center director and Harry G. Guthmann Professor of Finance at the Kellogg School. "But now risk management has become more integral to the decision-making process. The most forward-looking companies will integrate risk management into high-level managerial decisions."

Rousing new thought leaders

Founded in 2001, the Zell Center seeks to take a holistic approach to risk management and to stimulate thought across disciplines. Thanks to the center's support, risk management research at the Kellogg School has expanded beyond mathematical tools and into areas such as neurofinance — the study of how biology affects risk-taking behavior — and the determinants of risk attitudes. The Zell Center has become a focal point for these new endeavors, drawing thought leaders in risk research to teach at Kellogg and speak at its conferences.

Initiatives supported by the center include a visiting scholar program and Wednesday seminar series in which presenters from around the world address risk management topics. This year's speakers have included Enrichetta Ravina, a professor at the Columbia Business School, who presented "Love and Loans: The Effect of Beauty and Personal Characteristics in Credit Markets," and Guillaume Plantin, a professor at the London Business School, who discussed "Equilibrium Subprime Lending."

The Kellogg School's extensive risk management curriculum explores topics such as environmental risk, legal risk and decision/game theory. Students who complete the course sequence and a research paper on risk management are eligible for a $25,000 Zell Center scholarship. This year's recipients are Massimo Mancini '09, whose paper addressed corporate risk hedging strategies and value creation for Southwest Airlines shareholders, and Jeff Schaeffer '10, who focused on the impact of the fair-value measurement standard on the risk, investment structure, and performance of market participants before and during the current financial crisis.

The center also supports the Asset Management Practicum, a four-quarter course sequence designed to provide students with practical investment management experience by managing a portion of the Kellogg School's endowment.

In addition, the center offers a certificate program on risk management at the executive education level. In partnership with the Professional Risk Managers' International Association, the program provides managers with an overview of risk management in the marketplace, including credit, market and operational risk. It also addresses how to communicate risk.

Walker says the Zell Center is committed to bringing together the rigor of academic research and the relevance of expertise from leading practitioners. It aims to serve as a focal point for risk research and debate for academics, business leaders and students.

"The trend toward greater globalization and complexity in business and business relationships continues to grow," Walker says. "It is clear that the winners in the world of business will be those who are better able to manage risk."