Internal and External Risk Management

Internal risk management is about disaster aversion. External risk management is about the probability of loss.

External risk management is strictly about the relative size of your bet. Strictly, it is about the degree of affordability of the worst possible loss. A prudent external risk management plan ensures that each individual bet and each collection of correlated bets risks less than half of your available bankroll. The external risk management process should be the same for all bets. The primary question you should always be asking yourself is how much you can lose and how much you can afford to lose.

External risk management is far more important than internal risk management. Good external risk management keeps you in the game when things go wrong. Never forget that eventually things will go wrong.

Internal risk management is disaster identification and mitigation. It’s all about what can go wrong, and what can be done to prevent it. Internal risk management starts with a list a list of the possible disasters. A prevention and mitigation strategy is then developed for each risk. The process is simple and straight-forward. Just going through the process gets many of the risks under control, and it is essential to getting the risks solidly under control.

The quality of internal risk management is a factor in the execution of external risk management. The more the internal risks are kept under control, the less risky the overall bet is. Always consider the internal risk management when evaluating the probability of loss.

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