Transcription of CHAPTER 4 HOW DO WE MEASURE RISK?
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CHAPTER 4 HOW DO WE MEASURE RISK?
1 CHAPTER 4 HOW DO WE MEASURE RISK? If you accept the argument that risk matters and that it affects how managers and investors make decisions, it follows logically that measuring risk is a critical first step towards managing it. In this CHAPTER , we look at how risk measures have evolved over time, from a fatalistic acceptance of bad outcomes to probabilistic measures that allow us to begin getting a handle on risk, and the logical extension of these measures into insurance. We then consider how the advent and growth of markets for financial assets has influenced the development of risk measures.
Estimating Probabilities: The First Step to Quantifying Risk Given the focus on fate and divine providence that characterized the way we thought about risk until the Middle Ages, it is ironic then that it was an Italian monk, who initiated the discussion of risk measures by posing a puzzle in 1494 that befuddled people for almost two centuries.
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