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Risk: the story on HearLore | HearLore
— Ch. 1 · Etymological Origins And Definitions —
Risk.
~7 min read · Ch. 1 of 7
The word risk first appeared in English texts during the year 1621. Early writers spelled this term as risque to reflect its French origins. The spelling shifted to risk by the year 1655. Blount's Glossographia from 1661 defined risk as a synonym for hazard. This older meaning described a potential source of harm rather than modern probability calculations. The Oxford English Dictionary recorded these early definitions in its first edition published in 1914. A second edition followed in 1989 with similar wording. Modern dictionaries now define risk as the possibility of something bad happening. The International Organization for Standardization issued definition ISO 31073 in later years. This standard describes risk as an effect of uncertainty on objectives. It notes that uncertainty stems from any deficiency of information related to understanding or knowledge. Some experts argue that risk remains subjective and context-specific depending on the situation.
Mathematical Frameworks And Models
Risk often appears as a set of triplets describing scenarios, probabilities, and consequences. These mathematical structures allow analysts to quantify potential outcomes. Probability density functions express uncertainty about specific results. Cumulative distribution functions plot the likelihood of exceeding given losses. Analysts use value at risk to summarize the size of a distribution's tail. Expected values combine probabilities and consequences into single numbers. Binary possibilities like accident or no accident form simple cases. Total risk sums risks across multiple scenarios when outcomes remain comparable. Statistical decision theory defines risk functions based on expected loss values. Most people are not actually risk-neutral despite what some models assume. Pascal's mugging demonstrates issues in assessing risk solely by expected value. Outcome frequencies measure discrete events per unit time. Individual risk refers to the expected annual probability of death. Group risk relates frequency to the number of people suffering harm. Environmental damage such as oil spills also uses these frequency measures. Benoit Mandelbrot distinguished between mild and wild risk types. Mild risk follows normal distributions while wild risk follows fat-tailed distributions. Wild risk renders the law of large numbers invalid or ineffective. A common error involves underestimating the wildness of actual risk situations.
When did the word risk first appear in English texts?
The word risk first appeared in English texts during the year 1621. Early writers spelled this term as risque to reflect its French origins before the spelling shifted to risk by the year 1655.
What is the definition of risk according to ISO 31073?
ISO 31073 defines risk as an effect of uncertainty on objectives. This standard notes that uncertainty stems from any deficiency of information related to understanding or knowledge.
How does Benoit Mandelbrot distinguish between mild and wild risk types?
Benoit Mandelbrot distinguished between mild risk which follows normal distributions and wild risk which follows fat-tailed distributions like Pareto or power-law patterns. Wild risk renders the law of large numbers invalid or ineffective for financial markets.
Who established distinctions between measurable risk and immeasurable uncertainty in 1921?
Frank Knight established distinctions between measurable risk and immeasurable uncertainty in 1921. His work Risk, Uncertainty, and Profit remains foundational for economic theory today.
When did the term Risk society appear and gain popularity?
The term Risk society appeared during the 1980s with growing popularity in the 1990s. This popularity linked to trends thinking about wider modernity and environmental concerns.
Adults possess an intuitive understanding of risk that may not be exclusive to humans. Ancient societies believed in divinely determined fates before modern statistics emerged. Early uses of the word risk coincided with an erosion of belief in divine fate. Intuitive perceptions often prove inaccurate due to reliance on psychological heuristics. The affect heuristic relies on emotion to make decisions about danger. The availability heuristic judges event probability by how easily instances come to mind. Rare but dramatic causes of death receive over-estimation from public perception. Common unspectacular causes suffer from under-estimation in everyday thinking. Paul Slovic developed a psychometric paradigm assuming risk is subjectively defined by individuals. His work suggests intuitive emotional reactions dominate human evaluation of threats. Purely statistical approaches lack emotion and fail to motivate proper preventive action. Cultural theory views risk perception as a collective phenomenon where cultures select specific risks for attention. Different worldviews create difficulties when agreeing whether a hazard remains acceptable. Bounded rationality leads people to discount extreme events because their probabilities seem too low. One leading cause of death involves road accidents caused by drunk driving. Drivers frame this problem by largely ignoring the risk of serious or fatal accidents. Neurobiological studies show the right prefrontal cortex takes global perspectives while left activity relates to local processing.
Financial Applications And Volatility
Volatility measures the degree of variation in trading prices over time. Analysts calculate this using standard deviation of logarithmic returns. Modern portfolio theory measures riskiness through variance or standard deviation of portfolios. Optimal combinations of weights create what experts call tangency portfolios. These portfolios still contain undiversifiable systematic sources of risk. The Capital asset pricing model treats these optimal portfolios as market portfolios. Beta coefficients measure sensitivity of individual assets to overall market changes. Risk-neutral measures serve as probability tools for pricing financial derivatives. Financial markets use these measures due to fundamental theorems of asset pricing. Benoit Mandelbrot argued that risk assessment must differ fundamentally between mild and wild types. Mild risk follows normal distributions subject to regression to the mean. Wild risk follows fat-tailed distributions like Pareto or power-law patterns. Infinite means or variances render the law of large numbers ineffective for wild risks. A common error involves underestimating the wildness when assessing actual market conditions. Valid and reliable analysis requires avoiding assumptions that all risks behave mildly. Proxy data from other contexts often serves as analogue information for estimation. Theoretical models include Monte Carlo simulation and Quantitative risk assessment software. Logical models utilize Bayesian networks, fault tree analysis, and event tree analysis.
Risk Management Strategies And Standards
Organizations take actions to avoid and mitigate downside risks while considering upside opportunities. Risk management operates at strategic, operational, and individual levels within companies. ISO 31000 provides general guidelines on managing risks faced by organizations globally. Risk identification finds, recognizes, and records potential threats before they occur. Hazard identification serves this same function in safety contexts specifically. Risk analysis comprehends the nature of risk and determines its level of severity. Risk evaluation compares estimated levels against criteria to determine significance. Most activities allow reduction through adding further controls or treatment options. Adding these measures typically increases cost or inconvenience for participants. It rarely becomes possible to eliminate risks altogether without discontinuing the activity. Sometimes increasing risks secures valued benefits despite apparent contradictions. Tolerability frameworks divide risks into three bands: unacceptable, tolerable, and broadly acceptable. Unacceptable risks permit only exceptional circumstances for operation. Tolerable risks require keeping them as low as reasonably practicable. Broadly acceptable risks do not normally require further reduction steps. Terms like risk appetite, attitude, and tolerance describe organizational stances toward taking risks. One's attitude may be described as risk-averse, risk-neutral, or risk-seeking depending on strategy. Risk transformation employs factors into advantages rather than just mitigating dangers. Risk transfer shifts liabilities from one party to another typically an insurer.
Philosophical Debates On Uncertainty
Peter L. Bernstein showed that people used risk estimates before statistics developed. Captains and merchants shared voyage stories at coffeehouses comparing notes about hazards. Letters became increasingly important as correspondents updated beliefs about weather, wars, or piracy over long distances. Qualitative data helped investors judge how dicey a proposed voyage felt. Philosophers now argue there is more to objective risk than likelihood of undesirable outcomes. Ebert et al suggest distinguishing risk monists from risk pluralists in modern theory. Risk monists claim just one correct way exists to understand risk. Probability judgments diverging from calculus were deemed wrong by these thinkers. Pluralists claim different valid notions of risk exist simultaneously. People living before statistics developed did something legitimate when estimating risks. Modal accounts define situations as risky when nearby possible worlds contain serious harm. Normic accounts assess risk through system functions and norms rather than bare probability. A harm counts as high risk when it occurs in most normal continuations of present setups. These approaches allow consideration without relying on unknown probabilities especially in domains lacking predictive power. Frank Knight established distinctions between measurable risk and immeasurable uncertainty in 1921. His work Risk, Uncertainty, and Profit remains foundational for economic theory today.
Societal Impact And Manufactured Risks
Anthony Giddens and Ulrich Beck argued that humans have always faced natural disaster risks. Modern societies expose themselves to pollution resulting from the modernization process itself. Giddens defines these two types as external risks versus manufactured risks. The term Risk society appeared during the 1980s with growing popularity in the 1990s. This popularity linked to trends thinking about wider modernity and environmental concerns. Firefighters face exposure to fire and building collapse risks during their daily work. Harbor signs warn visitors that use of walkways happens at their own risk. Asteroid impacts represent examples of global catastrophic risks facing humanity today. John O'Brien noted that people's autonomy often gets compromised by institution walls now. Risk management practices sometimes prevent gaining further independence or accessing community fully. Contradictions between formal controls and subjective factors undermine service values in human services. Emotional and ideological roles produce tensions creating heated conflicts over safety measures. Environmental hazards threaten both human health and ecological systems globally. The United States Environmental Protection Agency monitors chance of harmful effects regularly. Insurance companies assess mortality risk, longevity risk, and interest rate risk constantly. Lloyd's provides measurable uncertainty frameworks for various financial instruments worldwide.