Risk Management

Bayesian Math for Dummies

Steve Miller wrote an article a couple weeks ago on using Bayesian statistics for risk management. He describes his friend receiving a positive test on a serious medical condition and being worried. He then goes on to show why his friend needn’t be worried, because statistically there was a low probability of actual having the condition, even with the positive test.

Understanding risk is an interest of mine, and while I’ve read articles about Bayesian math in the past, the math is above my head. I never studied statistics, nor do I plan to. But I am interested in the concepts behind statistics, so I can understand probabilities better. And I can do basic math. Steve’s article was dense with math I didn’t quite get, but I was able to translate it into something I could understand.

So now, for statistically challenged individuals, I present my translation of Steve’s calculations, Bayesian math for dummies.

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Unknowns & Uncertainties: Recent Reading

This past week the world has been in a state of chaotic uncertainty. The financial markets crashed in slow motion while talk of a prolonged recession intensified. With a business, a mortgage about to start adjusting and a girlfriend in college, I’ve been paying attention to the state of the world more than normal. Additional readings on risk, uncertainty, and social interactions have topped off the week.

The result has been a growing sense of uncertainty. A knowledge that I just don’t know. I’m still processing everything I’ve been reading, and the effect it will have on the articles I had planned to write on risk and angel investing. So rather than write about half-conceived ideas, this week’s post details what I’ve been reading. Continue reading >

Understanding Risk: A Basic Introduction

“They made risky investments.”

“He’s a risk-taker.”

“It’s a calculated risk.”

“That’s too much risk for me.”

Every day we hear people talking about risk, especially lately. But what really is “risk”, and how do we deal with it?

Up until a couple months ago, I had treated the word risk like we treat the world love or happiness. An abstract concept that described an amorphous feeling, rather than a concrete concept. Risk was intuitive; you knew it when you saw it, but you didn’t go around quantifying it.

Studying risk in the financial services industry has opened my eyes to the science of risk. How we decompose, quantify and handle risk. And how to develop principles of risk management that have practical application throughout life. This article gives an introduction to the basic concepts surrounding risk using the example of driving a car. Future articles will delve deeper into specific areas, and address how risk applies in entrepreneurship, angel investing and daily life. Continue reading >