This book for risk specialists, and those very interested in risk, contains a simple but powerful theory of risk, expressible both as simple equations and as a set of principles. These principles apply to both financial and non financial systems, and reveal a unity of principle in a diversity of system phenomena.

The author initially employs a new measure of risk, MEL risk, which is the mean expected loss of system throughput capacity (or return on investment) with respect the best-case throughput (or return) when the hazards risked do not occur.

He shows that where throughput capacities (or returns) are randomly distributed, as in a stock portfolio, MEL risk is closely equivalent to the conventional standard-deviation risk measure (due to Markowitz) used with financial systems. However, MEL risk is uniquely applicable to non financial systems, where a clear best-case throughput capacity is usually possible, and also to options, where a best-case return is often possible (the case where a shorted option expires worthless). (Actually, as shown in a later paper by the author [See Reference 2 below, entitled: "Time period and Risk Measures ..."] MEL-risk is actually the short-time period version of standard deviation risk, so that it not really a new risk measure, but merely an old measure seen in a new light.)

Using MEL risk, in the book's core Chapter 5 the author presents an elementary derivation of a general risk equation that covers all systems exposed to risk, and not merely financial systems. This new general risk equation, hitherto unknown, allows for risk elimination by any of three fundamental methods, or by combinations of these methods, or by variations that give rise to a margin of safety, thus vindicating the ideas of the late Benjamin Graham. The risk elimination feature is therefore something quite new.

Also in Chapter 5, the author shows further that the hitherto empirical (and somewhat mysterious) risk equation of finance due to Sharpe [that is, where return is principal times (interest rate plus extra return per unit of risk times beta)] follows from the general risk equation. The financial risk equation "pops out" of the general risk equation in an almost trivial manner but obvious manner, and banishes the apparent mystery of where the increased return from running financial risk comes from. This is also something quite new.

Either of two risk measures, the MEL-risk measure, or Markowitz's standard deviation measure can be used with the general or basic risk, although the MEL-risk measure is needed to derive the general risk equation in the first place.

Although written simply, the core Chapter 5 has depth. Consequently, before trying to master this core chapter, professional readers are advised to familiarize themselves with the established financial theory of risk (known as CAPM), which Chapter 5 partly builds on.

[The essentials of Chapters 4 and 5, (but not the risk elimination methods of later chapters) are covered more formally in a 2002 IEEE Transactions on Systems paper (see the reference and abstract below), and you may wish to inspect that paper before purchasing the book.]

Because the new risk equation derived in Chapter 5 allows for risk elimination, the book is thus not about managing risk by juggling and hedging risk, or by reducing value at risk, or by insuring against risk, which are the conventional approaches in finance. Instead, it is about bringing external influences to bear to force the elimination of the risk, in order to obtain the best case scenario. This is equivalent to the case where the risk is run, and the benefits of running it are harvested, but the hazards risked do not occur. With non financial systems this can usually be done. With financial systems, it can be done only sometimes.

The mathematics in the book is elementary and limited (only a minority of the pages have some mathematics), but is also profound, and usually needs pondering. However, the principles and core equations are heavily illustrated by numerical examples. There are no charts or diagrams in the book.

Potential readers from the financial world should be aware that the book is primarily about risk elimination in systems in general, although there is quite considerable content relating to finance.

If you are a professional, who must deal with risk in computer, engineering, or business systems, or if you must confront the risks in investment, military, or space flight operations, you need to understand the principles in this book. You should not expect to master this book in a single reading. It has to be studied diligently, and pondered too.