RiskMetrics - Identifying Risk
Introduction: The shifting paradigm of risk management
Learn how probability theory was invented and how it evolved into modern risk and decision theory
When Greeks threw dice in ancient times, they believed the outcome was predetermined by the gods rather than ruled by the laws of probability. The concept of risk as uncertainty did not yet exist.
The birth of modern risk management came in the 17th century, when Renaissance thinkers Pascal and Fermat invented probability theory while solving an intellectual puzzle. This theory gave us a newfound ability to make rational decisions about the future, and sparked many other discoveries. By quantifying uncertainty, we can make rational decisions about which risks are worth taking.
Advances in risk management theory have had a tremendous impact on global economic development. For corporations, the ability to measure and transfer risk made it possible to raise capital for large-scale investments. Similarly, individuals now have an unprecedented ability to take charge of their economic destiny, for example, through managing financial assets and liabilities, or by purchasing insurance.
When you complete this module, you will be able to:
- Define and conceptualize risk
- Explore the relationship between risk and opportunity
- Understand your own risk preference
- Identify, understand, and classify different types of financial risk
The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature.