A stylized probability distribution showing that risk is a process not an event.Dante Disparte
In risk management there is an adage that complex systems fail in complex ways. Yet, many risk management approaches deal with risk as if it were a discrete, time-defined event, rather than a dynamic, highly volatile process. Certain types of risk are acute in nature, but all risk lives along a continuum that is shaped by time and is compounded by action (or inaction). This wisdom is generally understood in financial markets, especially by traders whose “animal spirits” and speculative tendencies aim to exploit the ups and downs, as well as informational asymmetries in markets. Nassim Taleb in his seminal books Black Swan and Antifragile popularized the notion that fat-tailed (or leptokurtic) shocks are not as rare as once thought, calling for new frameworks for coping with their likelihood and, critically, surviving them altogether.
To begin with a stylized probability distribution can serve as a useful guide for how to think about risk and how it evolves by severity and likelihood. The left-hand side of the diagram highlights high probability low-impact events that…
