Both Aleatory and Epistemic Uncertainty Create Risk


Nice work Glen! I have asked the question before but “at what point does the decision NOT to obtain accessible knowledge about ‘reducible exposures’ [epistemic uncertainty] – such as excessive complexity – become a Corporate Governance issue?”

Epistemic risk is modeled by defining the probability that the risk will occur, the time frame in which that probability is active, and the probability of an impact or consequence from the risk when it does occur…

…For these types of risks we can have an explicit or an implicit risk handling plan. I use the word handling with special purpose. We handle risks in a variety of ways. Mitigation is one of those ways. But the risk handling work is actual work. It is in the schedule. We are doing work to mitigate the risk. We are buying down the risk, or we are retiring the risk. In all cases, we are spending money, and consuming time to reduce the probability that the risk will occur. Or we could be spending money and consuming time to reduce the impact of the risk when it does occur. In both cases we are taking action to address the risk.

via Herding Cats: Both Aleatory and Epistemic Uncertainty Create Risk.

Banking: Understand systems first; DON’T over-regulate; save $200bn p.a. for starters…


I can see, precisely, where the headline-writer was coming from and why. The extract of the article from ft.com is below but I felt the need to bring this together with an IBM report (a link to the report at the end of this article) that gets closer to the root of the problem – it still falls short – but points in the direction of an alternate path…

imageBy my interpretation, IBM are telling banks to “look within for the answers they seek”. They have highlighted something pretty fundamental. Made even more tantalising when they quantified it at $200 bn per annum with an emerging market of $900 bn per annum to play for!

“The financial system on which Dodd-Frank is being imposed is far more complex than the lawmakers, and even most regulators, apparently contemplate,” wrote Mr Greenspan.

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