“Risk management is designed expressly for decision makers—people who must decide what to do in uncertain situations where time is short and information is incomplete and who will experience real consequences from their decision.” – Dan Borge – Creator of RAROC
Backstory and context of the quote
- Decision-first philosophy: The quote distils a core tenet of modern risk practice—risk management exists to improve choices under uncertainty, not to produce retrospective explanations. It aligns with the practical aims of RAROC: give managers a single, risk-sensitive yardstick to compare opportunities quickly and allocate scarce capital where it will earn the highest risk-adjusted return, even when information is incomplete and time-constrained.
- From accounting profit to economic value: Borge’s work formalised the shift from accounting measures (ROA, ROE) to economic profit by adjusting returns for expected loss and using economic capital as the denominator. This embeds forecasts of loss distributions and tail risk in pricing, limits and capital allocation—tools designed to influence the next decision rather than explain the last outcome.
- Institutional impact: The RAROC system was explicitly built to serve two purposes—risk management and performance evaluation—so decision makers can price risk, set hurdle rates, and steer portfolios in real time, consistent with the quote’s emphasis on consequential, time-bound choices.
Who is Dan Borge?
- Role and contribution: Dan Borge is widely credited as the principal designer of RAROC at Bankers Trust in the late 1970s, where he rose to senior managing director and head of strategic planning. RAROC became the template for risk-sensitive capital allocation and performance measurement across global finance.
- Career arc: Before banking, Borge was an aerospace engineer at Boeing; he later earned a PhD in finance from Harvard Business School and spent roughly two decades at Bankers Trust before becoming an author and consultant focused on strategy and risk management.
- Publications and influence: Borge authored The Book of Risk, translating quantitative risk methods into practical guidance for executives, reflecting the same “decision-under-uncertainty” ethos captured in the quote. His approach influenced internal economic-capital frameworks and, indirectly, the adoption of risk-based metrics aligned with regulatory capital thinking.
How the quote connects to RAROC—and its contrast with RORAC
- RAROC in one line: A risk-based profitability framework that measures risk-adjusted return per unit of economic capital, giving a consistent basis to compare businesses with different risk profiles.
- Why it serves decision makers: By embedding expected loss and holding capital for unexpected loss (often VaR-based) in a single metric, RAROC supports rapid, like-for-like choices on pricing, capital allocation, and portfolio mix in uncertain conditions—the situation Borge describes.
- RORAC vs RAROC: RORAC focuses the risk adjustment on the denominator by using risk-adjusted/allocated capital, often aligned to capital adequacy constructs; RAROC adjusts both sides, making the numerator explicitly risk-adjusted as well. RORAC is frequently an intermediate step toward the fuller risk-adjusted lens of RAROC in practice.
Leading theorists related to the subject
- Dan Borge (application architect): Operationalised enterprise risk management via RAROC, integrating credit, market, and operational risk into a coherent capital-allocation and performance system used for both risk control and strategic decision-making.
- Robert C. Merton and colleagues (contingent claims and risk-pricing foundations): Option-pricing and intermediation theory underpinned the quantification of risk and the translation of uncertainty into capital and pricing inputs later embedded in frameworks like RAROC. Their work provided the theoretical basis to model loss distributions and capital buffers that RAROC operationalises for decisions.
- Banking risk-management canon (economic capital and performance): The RAROC literature emphasises economic capital as a buffer for unexpected losses across credit, market, and operational risks, typically calculated with VaR methods—central elements that make risk-adjusted performance comparable and actionable for management teams.
Why the quote endures
- It defines the purpose of the function: Risk is not eliminated; it is priced, prioritised, and steered. RAROC operationalises this by tying risk-taking to economic value creation and solvency through a single decision metric, so leaders can act decisively when the clock is running and information is imperfect.
- Cultural signal: Framing risk management as a partner to strategy—not a historian of variance—has shaped how banks, insurers, and asset managers set hurdle rates, rebalance portfolios, and justify capital allocation to stakeholders under robust, forward-looking logic.
Selected biographical highlights of Dan Borge
- Aerospace engineer at Boeing; PhD in finance (Harvard); ~20 years at Bankers Trust; senior managing director and head of strategic planning; architect of RAROC; later author and consultant on risk and strategy.
- The Book of Risk communicates rigorous methods in accessible language, consistent with his focus on aiding real-world decisions under uncertainty.
- Recognition as principal architect of the first enterprise risk-management system (RAROC) at Bankers Trust, with enduring influence on risk-adjusted measurement and capital allocation in global finance.
