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Pollyanna Risk


The risk that arises from naive optimism or a confidence bordering on arrogance by large institutional investors dealing in derivatives. Some huge losses are frequently sustained by major financial (and commercial) companies, which also seem to be implicitly encouraging rogue trading by their staffs. It is true that size matters, but that is the case in both directions, i.e., a true catastrophic loss can bring the largest of institutions to its knees, potentially causing collateral damage to the financial markets and the broader economy in more disastrous proportions.

In short, the stakes are very high, particularly in the case of even the grandest dealers and users of derivatives, and the risks associated with overconfidence in the shrewdness of those dealers and users can be of devastating consequences.

One last word: Pollyanna (Whittier) is the heroine of Eleanor Porter’s classic children’ book series “Pollyanna” (1913). She has a remarkably optimistic attitude as she always looks for the silver lining in everything.



ABC
Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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