Let's do an etymological textual research first. Both the Chinese word "risk" and the English word "risk" is an imported word, which roughly goes through the evolution history from the ancient Greek ρ risk α, to the Latin resicum, to the Italian risco, the French risque, and finally to the English risk. The ancient Greek etymology p-boat alpha refers to "root" or "stone", while the Latin word means "cliff" or "reef", which is finally extended to the metaphor of "inevitable things on the sea". And the definition of risk in modern language is generally"the possibility of loss or injury"。

Is the risk itself a bad thing? Starting from the simple definition of "risk"-the possibility of bad things happening-"risk" is at least not cute.But as financial investors, risk is actually the means of production on which we depend for a living.Because the essence of finance is the transcendence of resources in the space-time dimension; without risk, there is no risk pricing for the overstepping transaction, so the whole banking industry will wither, the securities industry will eat dust, and the insurance industry will collapse. So we never talk about "eliminating" risk-if I eliminate the means of production, I can only go to Meituan to be a rider-we just say "manage" risk, and risk management is to manage the future.

Managing the future is not predicting the future. For example, under the current economic shock, everyone is predicting how the market will go and the "market of the market"-- how the macro-economy will go.Is it V-shaped or U-shaped or W-shaped or L-shaped? If you ask me, don't be limited by the English alphabet, the rebound may also be Nike.But as Howard Marx said in the latest memo:Data are based on the past, while decisions are made in the future.In an extremely complex system, using experience to predict the future is tantamount to asking for a sword. Managing the future may be closer to reality than predicting the future. what we need to do is to provide protection and relief to the worst outcome (the greatest risk) according to the various ways of VUWL Nike.

Risk risk is also different from uncertain uncertainty. The biggest difference is that risk emphasizes the occurrence of bad outcomes, while uncertainty is ambiguous. For example, I'm not sure how sunny or rainy the weather will be next month, but paddling, sun exposure or flood in the office won't hurt me anyway. for me, it's just uncertainty. But if it is an ancient farmer, then the next weather will be risk to me, because of sunny or rainy, I may die suddenly without harvest. The same is the weather, the former is uncertainty, the latter is risk. And I created a rough thumb rule that distinguishes risk from uncertainty--Will anyone buy insurance against this uncertainty? If there is, it is a risk.

In addition, a completely expected bad outcome is not a risk. In the stock market, this is the so-called "effective" price in. If everyone knows that Lucky is doomed to bankruptcy, then it will not be a risk if Lucky does go bankrupt in the end, because this fact has been reflected in the stock price, and bad things (stock price collapse) have already happened. And for our future management, the most important thing is to manage the uncertain bad things, and we can only carry the certain bad things. When you know that you are going to be cut leeks, it is essentially not cutting leeks.When you think I must stand you up, I dove you, in essence, it is a kind of non-pigeon.

In order to manage the uncertain bad things in the future, our ancestors walked a long and miserable Shu road. Being the enemy of Heaven-A History of Human risk Exploration tells a mini history of human trying to tame risk and manage the future. And what our ancestors did.It is to turn the non-digital into digital, the unquantifiable into quantitative, and build the model that cannot be modeled.With various theories and metaphysics to counter the uncertainty of risk, in the hope that the language of the crystal ball will hit it off with the realization of the future. Such as:

From the ancient dice game to Caldano's on Gambling Game, from the biography of Pascal and Fermat to the theory of probability, to the theory of probability under the known condition of Thomas Bayes theorem, to Laplace, to Gauss, to Markov, probability theory has finally become a handy tool for managing the future of risk management.

From Jacob Bernoulli's delving into the law of large numbers, to an engineer named Murphy: if he could do one thing, he would certainly do something bad; from Harley (Halley's Comet) who was entrusted by the Royal Society to study human death and life expectancy, to Demofer's publication of Survivor annuity, and then to London's cafes to grow the most famous insurance company in history, the law of large numbers spawned the insurance industry.

From another Bernoulli-Daniel Bernoulli (Jacob's nephew) added human utility to the mathematical model, to another Daniel-Daniel Kahneman planted the banner of psychology on the territory of economics with "prospect theory". The exploration of human nature has given rise to behavioral finance (or behavioral economics).

From the medieval Venice merchants scattered "cabin", to commodity derivatives trading, and then to Markowitz's modern combination theory, the simple idea of "eggs packed in baskets" has derived the basic model of modern financial combination.

Our wise ancestors are very good at playing. But to this day, there is still no consensus on the nature of risk when it comes to investment. To put it simply, there are differences between the traditional school and the academic school.

The traditional view-- or we can call it the "Buffett view"-- holds that risk is "the possibility of loss or injury", andThe way to reduce the risk of investment is to buy a good company at a "safe marginal cheap price" or at least a "reasonable price".。

But the academics who put forward the modern financial theory should ask the traditionalists, I want to quantify whether the modeling is good or not, and the "possibility" you put forward is like a fantasy, how can I quantify it? For example, how to compare the risks between kicking and skydiving: kicking is likely to be shoveled, but at most a broken leg; parachuting out of a black swan is highly unlikely, but if something goes wrong, it will end up with a meatloaf. Compared with the two, who is riskier?

SoThe academic approach is to start with empiricism and find a general rule from a large number of historical data: risky assets generally have greater price fluctuations.

So they find an agent for the risk in their mind, called volatility, the risk of large volatility is high, the risk of small fluctuation is low, and the fluctuation itself also has an agent number, called standard deviation. Then they divide risk into systemic risk (systematic risk) and non-systemic risk (non-systematic risk). According to modern portfolio management, non-systemic risks (also known as company-specific risks, such as the collapse of a company's headquarters) can be eliminated by adequate diversification. Therefore, in their eyes, the risk is only systemic risk, while non-systemic risk can be removed by building a portfolio with very low correlation.

But the traditionalists, in turn, fiercely criticize the academic perception of risk. First of all, when it comes to quantifying risk as standard deviation, Buffett said it was something. For example, if there are two stocks An and B, the share price of A has closed at 1, 3, 2, 4, 5, 6 (block) on the last trading day of the past six years, while B's share price has been 2, 2, 2, 2, 1 (block) in the past six years. When you use the data analysis, the fluctuation of An is much greater than that of B, and you come to the conclusion.The A stock which has increased sixfold is riskier than the B stock which has been halved.。

This conclusion shows that the academic school can not play well in practice. So in the real world of risk management, we need some other practical tools. What is more common is the VaR model developed by J.P.Morgan, which can be translated as a "value at risk" model to measure the maximum possible loss of a financial product or portfolio.

VaR can measure the potential loss over a certain period of time, as well as the possibility of the loss. For example, 10% monthly VaR=5%, reads-during this period, the market value of the asset (portfolio) will fall by at least 5% in 10% of the cases. I do not intend to delve into this model, but in short, the core of its idea should be traced back to the original intention of risk: to explore the possibility of maximum loss.

Of course, some people think that it is not enough to understand "the possibility of loss". For example, Professor Damodalan of New York University says, who has the best definition of risk? -- Chinese.The subtext of the word "crisis" in Chinese is that if there is danger, it must be organic.. Others only see the damage of the risk, or only the unwelcome fluctuations, but not the opportunities that the Chinese see.

It is true that investment needs to seize the opportunity in the risk. As mentioned earlier, as far as investment is concerned, risk is actually the means of production that feeds us, and we cannot eliminate it. But we cover the bad news of the future by managing risk, for example, buying insurance for ourselves-- whether it's consumer insurance or portfolio financial insurance-- is the greatest awe of fate.

For example, if you do one thing, you can go wrong more or less. You may be anxious, but after trying enough times, you will find that even if there is an error, your return on doing it is generally stable.The same is true of investment, an investment may be lost because of Black Swan, but enough rational and diversified long-term investment will eventually give you a reasonable return on investment, which is almost destined to happen.This is the law of large numbers, and knowing it will actually make you happier.

Along the way, all the ideas of our ancestors are also making our lives better and making the future more "manageable". We are still in awe of the future, but we are no longer afraid. When a bad sea sails, a big ship breaks the waves.