The social dimensions of financial risk
| Date | 01 March 1997 |
| Pages | 195-207 |
| DOI | https://doi.org/10.1108/eb024927 |
| Published date | 01 March 1997 |
| Author | Atul K. Shah |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Volume 5 Number 3
The social dimensions of financial risk
Atul K. Shah
Received (in revised form): 6th May, 1997
Department of Accounting and Finance, University of Essex, Wivenhoe Park, Colchester C04 3SQ;
tel:
01206 873 333; fax: 01206 873
598;
e-mail: ashah@essex.ac.uk
Dr Atul K. Shah is a Lecturer in the
Department of Accounting, Finance and
Management at the University of Essex.
He obtained his PhD from the London
School of Economics in 1993, and has
since taught at the Universities of Bristol
and Maryland. His research interests are
principally in the regulation of corporate
and financial institutions and markets.
ABSTRACT
As money has come to play a central role in
modem society the risk of
losing
money, finan-
cial
risk,
is a major
concern
for individuals and
societies. Yet the understanding and analysis of
financial risk in modern finance theory is very
weak and incomplete. Its definitions are
muddled with risk management issues, implying
that only manageable risks are relevant for
scientific analysis. There is also an explicit bias
towards measurable risks, implying that unmea-
surable risks are somehow irrelevant. Risk ana-
lysis in finance is devoid of
an
ethical stance, a
prerequisite for any reasonable discussion of
risk.
Beck's 'Risk Society' is a powerful cri-
tique of
modern science
and its inability to deal
with the significant
increase
in social and
ecolo-
gical risks
created
by
modern
industrial society.1
This paper uses
concepts
generated by Beck
to unravel the various dimensions of financial
risk,
many of which have hitherto been ignored
in the mainstream finance literature. It reveals
the extent to which the analysis and under-
standing of
risk
in modern finance theory is par-
tial and incomplete. Suggestions are then made
for how the analysis of financial risk could be
modified to include a wide range of individual,
ethical and
societal
dimensions.
INTRODUCTION
Financial risk, or the risk of losing money,
is a very real and significant risk in modern
society. The loss of a job would not only
have an impact on an individual's source of
income, but could threaten the individual's
entire livelihood and break up the family.
Similarly, the loss of a pension could mean
hunger, illness and misery for an old-aged
pensioner. The loss of savings through the
collapse of a bank could have a devastating
blow on individuals. Inability to service a
mortgage or other debts could mean repos-
session of the home and destabilisation of
the entire family. For corporations, finan-
cial risk can affect the value of their busi-
ness investments and financial assets. At a
societal level, the bankruptcy of
a
currency,
as happened recently to the Mexican peso,
could have a dramatic impact on the entire
economy. Similarly, the widespread failure
of banks could lead to a major depression
as happened in North America in the
1930s. In the recent Barings fiasco, one tra-
der's derivatives dealings were sufficient to
bring down a 200 year old institution.
The aim of this paper is to analyse pre-
sent day knowledge about financial risk
and evaluate the extent to which it pro-
vides a comprehensive understanding of
risk. The findings suggest that because of
Journal of Financial Regulation
and Compliance, Vol. 5, No 3,
1997,
pp 195-207
© Henry Stewart Publications,
1358-1988
Page 195
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