Investing confronts us with both risk and uncertainty — and the difference between the two is critical. Inexactitudes notwithstanding, risk does at least lend itself to measurement — this is the central thrill of Bernstein’s Against the Gods. But uncertainty is a different matter, and this is Lowenstein’s tale. “Unlike dice, markets are subject not merely to risk, an arithmetic concept, but also to the broader uncertainty that shadows the future generally,” he writes. “Unfortunately, uncertainty, as opposed to risk, is an indefinite condition, one that does not conform to numerical straightjackets.”
“Perhaps one of the greatest shocks from the financial crisis has been the widespread failure of risk management in what were widely regarded as institutions whose specialty it was to be masters of the issue,” a 2011 report by the OECD offers.1 Somewhat buried in the report, its writers observe that discussions of risk are too often confined to financial risks — things that lend themselves to spreadsheet analysis. But the financial crisis resulted equally so from non-financial, or operational risk, which is not constrained by “numerical straightjackets.”
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