Atomic Energy of Canada Limited
NBER Working Papers and Publications
|November 2011||The Quantification of Systemic Risk and Stability: New Methods and Measures|
in Quantifying Systemic Risk, Joseph G. Haubrich and Andrew W. Lo, editors
This chapter analyzes world economic data in order to predict the next crisis probability based on the presence and influence of human risk taking and decision making in financial markets. It summarizes recent ideas on risk prediction for multiple technological systems using existing data, and explicitly includes the key impact of human involvement using the learning hypothesis. It is argued that risk is caused by uncertainty, and the measure of uncertainty is probability. The risk of an outcome (accident, event, error, or failure) is never zero, and the possibility of an outcome always exists, with a chance given by the future (posterior) probability. The key is to include the human involvement, and to create and use the correct and relevant measures for experience, learning, complexity, ...
|May 2011||The Quantification of Systemic Risk and Stability: New Methods and Measures|
We address the question of the prediction of large failures, busts, or system collapse, and the necessary concepts related to risk quantification, minimization and management. Answering this question requires a new approach since predictions using standard financial techniques and statistical distributions fail to predict or anticipate crises. The key points are that financial markets, systems, trading and manoeuvres are not just about money, debt, stocks, instruments and assets but reflect the actions and motivations of humans, which includes the presence or absence of learning effects. Therefore we have the possibility of failures or rare or low frequency events due to human involvement. The rare or unknown event is directly due to human influence, and reflects both learning and risk tak...