What is risk?

In finance I have heard a number of different definitions of risk. Many are conflicting, but there are three characteristics that are exemplified in most definitions. Risk concerns some evil, though no one puts it that way. It concerns something future and some uncertain. These are related but not necessarily concomitant.

That risk concerns something evil is relatively clear. When we speak of “taking a risk,” we mean that we are doing something wherewith evil might befall us. We are taking a risk by investing in the stock market, because equities might crash and we lose everything (certainly an evil). We are taking a risk when we go sky diving, because this is not an ordinary occupation for people and it involves a definite evil, serious injury or death.

Here we must note that the evil of risk is not something trivial. Strictly there is a risk in me doing anything whatsoever, because some evil may befall me in nearly anything I do or in doing nothing at all. However, the evil of risk is something significant and non-trivial. Certainly, I risk some minor discomfort by turning my head left or right, but we do not speak of this as a risk, except in a trivial way.

Moreover, that risk concerns an evil is clear from that fact that we do not risk obtaining a good. While we may engage in some risky behavior to obtain a good, it is not risky because of the good to be obtained. Said differently, risk is not about something good, except as an evil is the deprivation of some good.

As we have already touched on risk involves some uncertainty. We do not know that the stock market will crash or our life be injured by sky diving. It is uncertain. Here again, this uncertainty is not something trivial. There is a trivial uncertainty that I may be harmed by a meteorite, but we do not say that I risk my life everyday in the face of such things. Such things are extremely rare and essentially negligible. Risk involves something uncertain with a serious possibility of occurring. The stock market does crash. Parachutes do fail.

Moreover, a risk is not something evil that is certain to occur. We do not all risk death, because it is an evil that will inevitability occur to us all. We do at times risk an accidental death, but we are not taking a risk of death in simply being alive.

Finally, risk involves some future evil. This is clear from the examples we have already explored. However, consider further that if my house might presently be on fire, this is certain an uncertain evil, but I do not risk it being on fire presently. If it is already on fire, though I am uncertain of it, it is an already present, but I risk nothing. If I leave a candle next to a pool of gas, then I risk my house being set on fire.

Therefore, a risk is some uncertain future evil. From this definition we explore the distinction that is often (poorly) made between “upside” and “downside” risk.

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One Response to What is risk?

  1. Pingback: Risk free Rate | Infinite Semiosis

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