79
and probability, and describes a few of the significant terms. The references cited provide
excellent resources for additional information.
History
“Risk” derives from the early Italian risicare, “to dare.” Thus, risk is a choice rather than
a fate, thus the story of risk is about the actions people dare to take.8 The word itself was
first used in the 17th century, and it rapidly became limited to cases in which the outcome
would be unfavorable.9
In simple statistical terms, risk can be thought of as expected loss—the probability of
some adverse event, multiplied by some measure of the severity of that loss.10 Thus, risks
have two major characteristics: adverse consequences and uncertainty.11 Risk connotes
both the probability and nature of unfavorable outcomes. Probability was first used to
express an objective characteristic of an event, something external that is discoverable by
repeated experiments. Discussions relative to this type of probability can be drawn from
games of chance and, indeed, cards and dice games played a major role in risk manage-
ment. The history is fascinating in that the concept of risk management began with the
mathematical observations of Omar Khayyam (poet and author of the Rubaiyat), who
lived from about 1050 to 1130. His observations were the basis for the concepts later devel-
oped by the 17th century French mathematician Blaise Pascal (1623–62), one of the fathers
of the theory of choice, chance and probability.12 It was the correspondence between Pascal
and Pierre de Fermat (1601–65), starting in 1654, that first described a method for predict-
ing mathematical futures.13 Fermat was a lawyer and jurist with a keen and profound
interest in mathematics. Even though the letters written by de Fermat and Pascal were
addressing a game where one player wins in fewer than the maximum number of rounds,
they had a much broader implication. The letters laid the foundations of probability and
thus influence decisions each of us makes each day.
It should be mentioned that calculating probabilities is an integral part of many of
the techniques used for the analysis of hazards and risks, including failure mode effect
analysis (FMEA) and fault tree analysis (FTA). In FMEA, the company must identify all
potential failure modes and estimate severity, occurrence and detection. Once failure
modes have been enumerated, a fault tree can aid in estimating the likelihood of any
given mode.
Pascal and de Fermat were the first individuals to explain how to predict the future
by calculating, often with extraordinary precision, the numerical likelihood of the occur-
rence of a particular event. They were not aware of an earlier work written by Girolamo
Cardano (1501–76), the most famous physician from the 16th century. His treatise on gam-
bling, entitled Liber de Ludo Aleae (Book on Games of Chance), appears to have been the first
serious effort to develop the statistical principles of probability. The word “probability,”
however, does not appear in the book. For anyone interested in the derivation of words,
the Latin root of probability is a combination of probare, which means to test, to prove or to
approve, and ilis, which means able to be. Interestingly, Cardano’s book was not avail-
able during his lifetime, but was found among his manuscripts when he died. It was first
published in 1663, and by then impressive progress in the theory of probability had been
made by others who were unaware of Cardano’s seminal efforts.14
In 1657, just three years after the de Fermat-Pascal correspondence, Dutchman
Christiaan Huygens provided the first account of what is recognized as modern probability
theory. He is generally regarded as the leading scientist of his day. His 16-page paper “De
ratiociniitis in ludo aleae” (“On Reckoning at Games of Chance”) became the standard text in
probability theory for the next 50 years. The paper established the basic rules for comput-
ing probabilities. Huygens acknowledged that his work was built on the breakthrough
made by Pascal and de Fermat, but he went well beyond the two Frenchmen in recognizing
the potential to apply the methods of probability theory outside the gaming rooms.15
Risk: History, Probability and Management
and probability, and describes a few of the significant terms. The references cited provide
excellent resources for additional information.
History
“Risk” derives from the early Italian risicare, “to dare.” Thus, risk is a choice rather than
a fate, thus the story of risk is about the actions people dare to take.8 The word itself was
first used in the 17th century, and it rapidly became limited to cases in which the outcome
would be unfavorable.9
In simple statistical terms, risk can be thought of as expected loss—the probability of
some adverse event, multiplied by some measure of the severity of that loss.10 Thus, risks
have two major characteristics: adverse consequences and uncertainty.11 Risk connotes
both the probability and nature of unfavorable outcomes. Probability was first used to
express an objective characteristic of an event, something external that is discoverable by
repeated experiments. Discussions relative to this type of probability can be drawn from
games of chance and, indeed, cards and dice games played a major role in risk manage-
ment. The history is fascinating in that the concept of risk management began with the
mathematical observations of Omar Khayyam (poet and author of the Rubaiyat), who
lived from about 1050 to 1130. His observations were the basis for the concepts later devel-
oped by the 17th century French mathematician Blaise Pascal (1623–62), one of the fathers
of the theory of choice, chance and probability.12 It was the correspondence between Pascal
and Pierre de Fermat (1601–65), starting in 1654, that first described a method for predict-
ing mathematical futures.13 Fermat was a lawyer and jurist with a keen and profound
interest in mathematics. Even though the letters written by de Fermat and Pascal were
addressing a game where one player wins in fewer than the maximum number of rounds,
they had a much broader implication. The letters laid the foundations of probability and
thus influence decisions each of us makes each day.
It should be mentioned that calculating probabilities is an integral part of many of
the techniques used for the analysis of hazards and risks, including failure mode effect
analysis (FMEA) and fault tree analysis (FTA). In FMEA, the company must identify all
potential failure modes and estimate severity, occurrence and detection. Once failure
modes have been enumerated, a fault tree can aid in estimating the likelihood of any
given mode.
Pascal and de Fermat were the first individuals to explain how to predict the future
by calculating, often with extraordinary precision, the numerical likelihood of the occur-
rence of a particular event. They were not aware of an earlier work written by Girolamo
Cardano (1501–76), the most famous physician from the 16th century. His treatise on gam-
bling, entitled Liber de Ludo Aleae (Book on Games of Chance), appears to have been the first
serious effort to develop the statistical principles of probability. The word “probability,”
however, does not appear in the book. For anyone interested in the derivation of words,
the Latin root of probability is a combination of probare, which means to test, to prove or to
approve, and ilis, which means able to be. Interestingly, Cardano’s book was not avail-
able during his lifetime, but was found among his manuscripts when he died. It was first
published in 1663, and by then impressive progress in the theory of probability had been
made by others who were unaware of Cardano’s seminal efforts.14
In 1657, just three years after the de Fermat-Pascal correspondence, Dutchman
Christiaan Huygens provided the first account of what is recognized as modern probability
theory. He is generally regarded as the leading scientist of his day. His 16-page paper “De
ratiociniitis in ludo aleae” (“On Reckoning at Games of Chance”) became the standard text in
probability theory for the next 50 years. The paper established the basic rules for comput-
ing probabilities. Huygens acknowledged that his work was built on the breakthrough
made by Pascal and de Fermat, but he went well beyond the two Frenchmen in recognizing
the potential to apply the methods of probability theory outside the gaming rooms.15
Risk: History, Probability and Management