The First Great Recession of the 21st Century

The First Great Recession of the 21st Century

Competing Explanations

Edited by Óscar Dejuán, Eladio Febrero and Maria Cristina Marcuzzo

The 2008–10 financial crisis and the global recession it created is a complex phenomenon that warrants detailed examination. The various essays in this book utilise several alternative paradigms to provide a plausible explanation and a credible cure. Great detail is given to this important analysis from different theoretical perspectives, presenting a clearer understanding of what went wrong and expounding misinterpretations of current theories and practices.

Chapter 4: Financial Crisis and Risk Measurement: The Historical Perspective and a New Methodology

Gumersindo Ruiz and Ramón Trías

Subjects: economics and finance, financial economics and regulation, history of economic thought


Gumersindo Ruiz and Ramón Trías The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature. Until human beings discovered a way across that boundary, the future was a mirror of the past or the murky domain of oracles and soothsayers who held a monopoly over knowledge of anticipated events. Peter L. Bernstein (1996, p. 1) Slowly it began to dawn on me that what we faced was not so much risk as uncertainty. Emanuel Derman (2004, p. 259) 4.1 RISK CONTROL IN FINANCE: A RECENT HISTORY In his book: Against the Gods: A Remarkable Story of Risk, Peter L. Bernstein (1996) makes a thorough historical analysis of the concept of risk. He starts from the development of the laws of probability and the pretension of having statistical rules that permit the decision-making process, and arrives at the 20th century to make a distinction between risk and uncertainty, the former being valuable and measurable while the latter is not. In economics, the concept of risk management as a practical technique, together with the use of statistical methods under certain theoretical assumptions, was introduced by Kenneth Arrow (1951, 1971) who was aware of the impossibility of predicting the future and its associated contingencies. Therefore, he developed a whole theory of diversification and insurance. The relevance of his thoughts lies...

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