1. Known Knowns
These are risks that have been correctly identified and properly measured. It however does not mean that any losses other than this can occur due to flawed models or just random nature (i.e. bad luck). The variation in losses other than the known losses however should not happen too frequently otherwise it would be indicative of something unusual.
2. Known Unknowns
These are risks that have not been accurately measured by a risk management system but are expected to be there. These arise due to expected imperfections in the risk measurement model like assumptions, complexity of the measurement process or human error while doing the measurement. These are normal risks associated with the measurement model.
Known unknown, refers to circumstances or outcomes that are known to be possible, but it is unknown whether or not they will be realized. The term is used in project planning and decision analysis to explain that any model of the future can only be informed by information that is currently available to the observer and, as such, faces substantial limitations and unknown risk.
One of the examples of this would be the assumption that the distribution the log of returns always follows a normal distribution, which is the basis of many risk management processes like PVAR. In practice distributions show a variation from this in that they have fat tails or kurtosis.
Liquidity risk forms another way of measuring known unknown’s. This is normally classified into accounting liquidity risk and market liquidity risk. Market liquidity risk is the risk that the price of an asset that may vary too much if an order has been placed to trade large quantities of the asset. This normally happens when the asset does not trade very frequently.
3. Unknown Unkonwns
These are risks that arise due to events or causes of losses than cannot be modeled or the existence of such factors cannot even be determined properly. These include political events affect normal operations that are not predicted, defaults on obligations by the opposite party involved in the transaction and also some types of liquidity risks that cannot be measured properly. There are many examples of such risks. For example in third world countries there is a lot of instability at a political level as governments and ministers rise and fall arbitrarily without any proper causes.
These are risks that have been correctly identified and properly measured. It however does not mean that any losses other than this can occur due to flawed models or just random nature (i.e. bad luck). The variation in losses other than the known losses however should not happen too frequently otherwise it would be indicative of something unusual.
2. Known Unknowns
These are risks that have not been accurately measured by a risk management system but are expected to be there. These arise due to expected imperfections in the risk measurement model like assumptions, complexity of the measurement process or human error while doing the measurement. These are normal risks associated with the measurement model.
Known unknown, refers to circumstances or outcomes that are known to be possible, but it is unknown whether or not they will be realized. The term is used in project planning and decision analysis to explain that any model of the future can only be informed by information that is currently available to the observer and, as such, faces substantial limitations and unknown risk.
One of the examples of this would be the assumption that the distribution the log of returns always follows a normal distribution, which is the basis of many risk management processes like PVAR. In practice distributions show a variation from this in that they have fat tails or kurtosis.
Liquidity risk forms another way of measuring known unknown’s. This is normally classified into accounting liquidity risk and market liquidity risk. Market liquidity risk is the risk that the price of an asset that may vary too much if an order has been placed to trade large quantities of the asset. This normally happens when the asset does not trade very frequently.
3. Unknown Unkonwns
These are risks that arise due to events or causes of losses than cannot be modeled or the existence of such factors cannot even be determined properly. These include political events affect normal operations that are not predicted, defaults on obligations by the opposite party involved in the transaction and also some types of liquidity risks that cannot be measured properly. There are many examples of such risks. For example in third world countries there is a lot of instability at a political level as governments and ministers rise and fall arbitrarily without any proper causes.
- the known known refers to circumstances or outcomes that are known to be possible, it is known that they will be realized with some probability (based on adequate experiments/data)
- the known unknown refers to circumstances or outcomes that are known to be possible, but it is unknown whether or not they will be realized (no data or very low probability/extreme events).
- the unknown unknown refers to circumstances or outcomes that were not conceived of by a modeler at a given point in time.
- the unknown known refers to circumstances or outcome a modeler intentionally refuse to acknowledge that he/she knows
No comments:
Post a Comment