Risk Management and the Black Swan

As humans, we often tend to forget too soon the lessons learnt from large events that changed the world or severely impacted the economy. Have we wasted many a good crisis?

History of risk management

In his book Against the Gods, Bernstein provides an overview of the development of risk management spanning many centuries. The story starts in ancient Greece. Although the Greeks thought about probability, this remained separate from applying probability to playing games or gambling and they often relied on oracles to take decisions. It took until the 13th century before the Arabic numbering system was introduced by an Italian which many of us will know from its sequences: Fibonacci. This new way of using numbers allowed much better for making all sorts of calculations (which is inherently more difficult than e.g. multiplying VIII with II).

During the following centuries, probability theory developed further and further, initially mostly driven by games and gambling. But also by a number of scholars that enjoyed measuring the height of people, or counting deaths to construct the first mortality tables. Typically, most of the measurements would lead to some distribution that looks like a bell curve. This naturally led to the notion of regression (or reversion) to the mean.

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