History of risk
Over time, our understanding of risk has evolved, moving from simple intuitions to mathematical formulations and sophisticated models. The study of risk is not limited to a single field but spans disciplines like economics, mathematics, psychology, and sociology.
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Ancient and medieval times
- Ancient cultures often associated risk with divine will or fate. Augury, or interpreting the will of the gods by studying the flight patterns of birds, was one method of risk prediction.
- The use of dice and lots for decision-making in ancient civilizations like Rome hints at an early intuitive understanding of probability and randomness.
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Renaissance
- The 16th century saw the emergence of probability theory. Gerolamo Cardano's "Liber de Ludo Aleae" (Book on Games of Chance) discussed probability and games of chance, laying the groundwork for future developments.
- The Pascal-Fermat correspondence in the 17th century established the foundations of probability theory, introducing the concept of expected value.
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Key milestone
If one were to pinpoint a singular turning point in the understanding of risk, it would likely be the development of probability theory in the 17th century through the correspondence between Blaise Pascal and Pierre de Fermat.
Before the formal development of probability theory, the concept of risk was largely approached through intuition, superstition, or experience. There wasn't a systematic or mathematical way to quantify uncertainty.
Precursor to Modern Risk Analysis: The groundwork laid by Pascal and Fermat allowed for the systematic study of random events. This transformed games of chance into mathematical problems, introducing concepts like expected value.
Application Across Fields: This mathematical foundation eventually permeated various fields like economics, insurance (actuarial science), and later, finance. Being able to mathematically model uncertainty made it possible to predict, manage, and insure against risks in unprecedented ways.
Influence on Decision Making: As the understanding of probability grew, it began to influence decision-making processes, emphasizing rational choices based on potential outcomes and their likelihoods. This would later give rise to utility theory and the understanding of human behavior concerning risk.
The Pascal-Fermat development of probability theory represents a paradigm shift in the understanding of risk. By introducing a structured, mathematical approach to uncertainty, it set the stage for sophisticated risk assessment and management techniques that have since become foundational in multiple disciplines.
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18th & 19th centuries
- Daniel Bernoulli introduced the concept of utility in 1738, laying the groundwork for the understanding of risk aversion and the field of behavioral economics.
- The establishment of insurance companies and the stock market made risk quantification and management vital. This period saw developments in actuarial science and financial mathematics.
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Post-1900
Post-1900, the world has faced multifaceted risks ranging from industrial accidents to global health crises and financial meltdowns. The advancements in the study of risk during this period reflect an adaptive response to these challenges, emphasizing the interconnected nature of modern systems and the necessity for comprehensive risk management strategies.
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Early to mid 20th century
- Insurance and Actuarial Science: With a growing modern economy, insurance industries refined actuarial tables, and risk became more mathematically quantifiable.
- Systems Theory and Cybernetics: In the 1950s and 1960s, scholars began to look at risks from a systemic perspective, understanding how different components of a system interact and influence each other.
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Mid to late 20th century
- Behavioral Finance Emergence: Researchers like Daniel Kahneman and Amos Tversky, in the 1970s and 1980s, explored how human cognitive biases influenced risk perception and economic decision-making, leading to concepts like prospect theory.
- Industrial Accidents and Risk Assessment: Incidents like the Three Mile Island nuclear meltdown (1979) and the Bhopal gas tragedy (1984) underscored the importance of comprehensive risk assessment and management in industries.
- Black Swan Theory: Introduced by Nassim Nicholas Taleb in the late 20th century, this theory emphasized the impact and unpredictability of highly improbable events.
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Post-2000
Post-2000, the most important aspect of the 'state of risk' is the realization of how interconnected and interdependent our global systems are. Risks are no longer isolated; they have cascading impacts that can traverse industries, economies, and borders. Effective risk management now requires a holistic view, considering multiple sectors and the potential for ripple effects.
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21st century
- 2008 Financial Crisis: Highlighting systemic risks in the banking and finance sectors, this crisis led to calls for better risk assessment models and regulatory oversight in the financial world.
- Enterprise Risk Management (ERM): As businesses became more global and multifaceted, ERM frameworks began to be adopted, looking at risks in a holistic manner across an organization.
- Technology and Cybersecurity: With the digital revolution, risks related to data breaches, cyber-attacks, and technological vulnerabilities became paramount, leading to the growth of cybersecurity as a field of study and practice.
- Global Health Risks: The SARS outbreak in 2003, followed by other global health emergencies like the COVID-19 pandemic in 2019-2020, underlined the importance of understanding and managing health-related risks on a global scale.