Time and Space... And Risk

Have you ever thought that risk management always operates in a context, and that context is determined by our sense of space and our view of time. Consider…Space is a buffer that allows us freedom from worrying about risk. That space might be geographical space – think of the luxury provided to the US of having two large oceans between them and any potential enemy, or it might be any buffer that can mitigate the effect of shocks. Consider any inventory, and how it shields a corporate from shocks in supply or in demand. It may be any shared space of common beliefs that facilitate action. For example, space might be an ideology like a religion or like capitalism. A market is an example of a shared space that limits the things we need to worry about (the risks) precisely because it defines the rules that determine how we interact.

Time is more subtle from a risk perspective. We infer risks from the past and extrapolate into the future. We see actual outcomes historically and think we can infer future distributions of potential events over a particular future time horizon (this is a so called frequentist view of statistics). At the very least we look at the past and infer priorities for future action.

It’s interesting I think to realize that we don’t simply have one horizon in space nor in time. For example, we have short term horizons for say monetary policies and long term horizon for fiscal policies. We have one day horizons for liquid assets and one year horizons for changing our suppliers or our technologies. Governments operate in the space of nation states but they also struggle with markets, and ideologies just as much.

Risk is the unexpected, and the unexpected breeds where differences in perspectives on time and space abound.