Date of this Version

5-12-2015

Document Type

Working Paper

Publication Details

Research work-in-progress

Regan, M. (2015). Understanding risk and uncertainty: A brief history (Working paper WP131).

Copyright © 2013-15 Michael Regan

Abstract

Extract: Risk is an explanation for human activity that doesn’t go to plan, i.e. the undertaking achieves an outcome at variance to expectation. The risks that we encounter today are similar in form and substance to those that faced our ancestors over the past 5,500 years. What has changed over that time is the greater complexity of systems today, which amplify the likelihood, and the magnitude of unexpected outcomes in all forms of human activity. For example, we load our economic and social infrastructure, our services, our supply chains and our commercial networks to breaking point. London’s public infrastructure, including its energy and water resources, performs at 98% of capacity at peak times with greater vulnerability to breakdown than systems operating at lower stress levels. On the other hand, there are greater opportunities today for risk-takers to speculate and disperse the adverse consequences of risk over a growing number of stakeholders and internationally networked institutions through sophisticated financial instruments, insurance, derivative securities, guarantees and indemnities. Capital markets play a key role in the monetisation of risk, its dissemination over a number of different asset classes and the provision of risk management services that support global trade and commerce. A market also provides a good proxy for identifying, measuring and valuing risk over time and at every minute of every day that the market is trading.

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