Hi ,
Quantifying risk is easy.
If you can accurately measure the odds of an event of interest occurring (be it a poker hand or a coin toss), then it just becomes a simple
calculation. It's on this principle the entire insurance industry is based.
Yet, quantifying uncertainty is hard.
If you don't know the odds of the event occurring (such as a bushfire or a market collapse), then things get difficult – because suddenly you have to
assume.
And what if your assumptions prove wrong?
The more uncertain the event, the more your results depend on your assumptions.
You can have the
best model in the world, but it won't matter at all.
If your assumptions are wrong, you will be, too.
Talk again soon,
Dr Genevieve Hayes.
p.s. This post was inspired by The Signal and the Noise by Nate Silver, which I highly recommend.
