PERSPECTIVES ON RISK MANAGEMENT
Daniel Augusto Motta
CEO of BMI Blue Management Institute
Risks are not new, but risk management is more recent. In 1654, during the Renaissance, French philosophers-mathematicians Blaise Pascal and Pierre de Fermat solved a puzzle proposed by Italian monk and mathematician Luca Paccioli and created as a result the Probability Theory, as well as the decision-making and prediction process based on numerical analysis. Previously, merchants, priests, aristocrats and peasants made daily decisions based on superstitions and prayers.
Several current risk management tools are still based on findings of the period between 1654 and 1760. We just use more advanced computational models.
In the 19th Century, statistician-mathematician Francis Galton postulated regression to the mean and greatly influenced all the future evolution in econometrics. Jules Henri Poincaré and Hendrik Antoon Lorentz devoted themselves to modeling chaotic deterministic systems. In the 20th Century, Harry Markowitz developed his risk calculation model for investment portfolios and revolutionized capital markets.
The Hungarian mathematician John von Neumann put forward the game theory, which was further developed by North American mathematician John Nash in 1950. A few years later, Fisher Black and Myron Scholes pushed the options evaluation model which led to a boom on the Chicago Board Options Exchange. Kenneth Arrow developed his Impossibility Theorem and the general equilibrium model, demonstrating how people make decisions in an uncertain environment. Finally, challenging the assumption of rationality in decision making,
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