Archive for June, 2009
Friday, June 12th, 2009
The fourth source of poor economic performance may derive from failures, often based on ignorance, in the management of risk. It involves concepts equally as sophisticated and complex as the economic concept of value.
Bernstein begins his book on risk with the provocative question, “Why is the mastery of risk such a uniquely modern concept?” He views risk as the concept that defines the boundary between modern times and the past.8 Prosperity, like risk management, is a new thing. So is it just a coincidence that wealth creation began about the time that the tools to manage risk began to take form?
It is an intriguing hypothesis, but it is clouded by the fact that many other types of progress accelerated at the same time. Nevertheless, a likely suspect for past economic stagnation might have been a general failure to manage risk. Clearly, there was no way prior to 1500, or likely prior to 1750, to develop scientific risk-management techniques. The mathematical tools were not there, the concept of probability was just evolving, and the notion of statistical sampling had not been developed. Risk management was still heavily tied into theology—pray for rain.
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