Eating fish is good for you, isn’t it? Yes. And No. While fish are valuable nutritionally, especially the ones rich in omega-3 fatty acids, they may also contain methylmercury. Omega-3 fatty acids apparently decrease risks of heart ailments and may also help neurodevelopment in unborn and young children. Methylmercury on the other hand is a neurotoxin: it can cause delays in the development of unborn or young children. This left the Food and Drugs Administration (FDA) with a risk-risk tradeoff decision. Should the consumption of fish be encouraged for its benefits (good risk) or discouraged on account of its dangers (bad risk)?
Risk Management and Communication for Food
For food in general, the Codex Alimentarius Commission defined risk management as one of the three components of risk analysis; the other two are risk assessment and communication. Risk management covers the ‘appropriate prevention and control options’ to be adopted following risk assessment, and in the light of the health protection of consumers and the promotion of fair trade practices. In the end the FDA issued an advisory that targeted a particular part of the population (pregnant women, nursing mothers, young children) and segmented fish into groups that were higher or lower risk (shark, swordfish and king mackerel have higher concentrations of mercury, for example).
A Different Risk Analysis in Finland
KTL (Kansanterveyslaitos or the National Public Health Institute of Finland) used Analytica to model risks associated with eating farmed salmon, following similar concerns. Some of the factors differed compared to the case handled by the FDA above. 40 years ago Finland had the world’s highest mortality rate due to heart disease, but now it is a model of healthy dietary habits. Giving up the health benefits of salmon (high in omega-3 fatty acids) would have meant having to substitute other foods and a possible return to higher beef-eating (a factor in higher rates of heart disease). Again, a risk-risk issue was at the root of the exercise with a need to model possible future outcomes.
From Fish to Finance
Risk-risk tradeoff, or risk-return trade-off as it is also called, is also a major topic in financial risk management. ‘No reward without risk’ is the slogan of many investors, with the goal of finding the appropriate balance between making a profit while also being able to sleep at night. Psychological factors also play an important part in assessing such risk-risk trade-offs, sometimes mistakenly so: for instance, higher risk is sometimes erroneously taken to automatically mean higher return. This kind of faulty thinking also occurs when people associate protective measures, such as new financial regulation, with a reduction in risk. They then engage in riskier behavior than they would have otherwise. This is also true in other domains, including personal health and security regulations. Dealing with such misconceptions means either being more objective about one’s own personal risk appetite, or constructing mathematical models to ‘tell it like it is’.
For portfolios of investments, whether financial or other, the General Portfolio System (GPS) developed by Lumina can help investors with risk management and necessary adjustments to achieve specific goals.
If you’d like to know how Analytica, the modeling software from Lumina, can help you manage risk in food, finance or any other industry sector, then try a thirty day free evaluation of Analytica to see what it can do for you.