Complex Decision-Making in Economy and Finance

15On Managing Risk in the Financial Domain

This chapter discusses the modeling of phenomena and uncertainties related to financial events and the approaches that can be implemented. It in part develops a number of ideas originated by Knight and Pretty [KNI 98].

15.1. Taking about disasters – from risks to catastrophes in finance

When we want to describe the dynamic evolution of a system, we cannot ignore the notion of disaster. By disaster, in the theory of the same name [THO 89], we mean a discontinuity that appears in the evolution of these systems: their global evolution is presented as a succession of continuous evolutions separated by sudden and important leaps, of a qualitatively different nature.

In our economy, the pattern is the same: disasters of various origins can occur at any time and change the course of events, sometimes in unpredictable proportions. For example, human tragedies such as the Bhopal gas leak in India in 1984, or environmental damage such as the oil spill caused by the Exxon Valdez shipwreck, with its 50 million liters of crude oil spilled in Prince William Sound, Alaska, in 1989, will be considered. In the agri-food sector, certain crises can have a profound and lasting impact on a company: as mentioned in Chapter 14, following a minor cleaning problem in the 1990s, traces of benzene were detected in Perrier brand bottles of sparkling water, and millions of bottles were recalled, with the irreversible consequences that we know! The crisis of new ...