Cheap Talk and Decision Making in Financial Institutions: Implications for the Risk Management Organization
Year Of Publication: 2013
Month Of Publication: August
Resource Link: Click here to open
Pages: 39
Download Count: 0
View Count: 1797
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 6-7-2014
Publisher: Administrator
Summary
This paper investigates the question of how risk management should be embedded in a financial firm's hierarchy. We take an innovative approach to answering this question by combining capital market theory with game-theoretic thinking. We develop a theory for the integration of risk management -- the provider of risk information -- into an organization based on private information and differences in preferences. A simple model compares the payoffs from uninformed decision making, solo decision making, independent decision making, and coordinated decision making when information about a project's expected return and risk is dispersed in the organization. Our findings have a number of implications for the organization of risk management.
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