A world of probabilities – or the art of professionally anticipating risks and opportunities

Frank Romeike | RiskNET – The Risk Management Network 

In a letter written on December 4, 1926 to the physicist and mathematician Max Born, one of the fathers of quantum mechanics, Albert Einstein wrote: “Quantum theory yields much, but it hardly brings us close to the Old One’s secrets.  I, in any case, am convinced He does not play dice with the universe.” The afterworld turned this into the popular quote: “God does not play dice.”

What Einstein meant, however, is not totally clear. Some claim that Einstein denied the probabilistic (stochastic) explanation of quantum mechanics, in other words, that there is no such thing as a coincidence in physics. Natural phenomena do not emerge from a subatomic game of change, but rather are based on universal principles according to the deterministic view of the world. Others are convinced that Einstein did not reject Born’s probabilistic interpretation and actually viewed it as the only satisfactory one. One should also take into consideration that the metaphors in this sentence leave considerable room for interpretation – and Einstein himself is no longer available for comment.

Probability calculations and serious ways to deal with uncertainty

It all comes down to whether the determinism of classical physics, especially based on the mechanics of Sir Isaac Newton, remains valid in quantum mechanics or not. That question has since been clearly answered: In the world of quantum mechanics, the states of a physical system are described using probabilities, for example, with the help of uncertainty principles. The role of stochastics in the world around us was proven by Bell’s Inequality, which enables a comparison of the properties of quantum mechanics and classical physics.

But probabilities do not only play a role in quantum mechanics.  Many things that we experience everyday are affected by probability and less by deterministic principles. Risk managers, in particular, should be adept at probabilistics and working with probabilities.  Probability calculations make it possible to deal with risks seriously. Risk managers should understand that stochastic statements are not a sign of weakness but rather a strength of scientific (and also quite practical) insight. The world of stochastics does not think in black-or-white terms or singular scenarios, but rather as a range of potential scenarios that have different probabilities of occurrence. The complete variability is visualized in the potential scenarios. Stochastic simulations, distribution adjustments and other probability calculation tools are used as mathematical aids to implement this approach. The alternative to stochastic thinking would be creating and fabricating alternative facts that are suitable to us – in other words, a presumption of knowledge that we simply do not have.

From ranges and anticipating and measuring risks

Blocking out a range of possible scenarios leads to a world that we would like to see but is not reality. All too often, risks that are difficult to anticipate and measures are ignored – even when they lead to a collapse. Many people despise uncertainty. They would rather concentrate on day-to-day activities instead of truly painful scenarios (e.g. Fukushima, sub-prime crisis, COVID 19 pandemic). On a side note, ‘stochastics’ comes from the Greek word (στοχαστικὴ τέχνη) meaning assumption and presumption. The mathematician Jakob Bernoulli discovered the value of stochastics for evaluating risks back in the 17th century. In his major work, Ars Conjectandi, he describes that assuming anything is fundamentally the same as measuring its probability. Bernoulli refers to the art of assumption and presumption (ars conjectandi sive stochastice) as the probability to measure things with the purpose that we can select and follow whatever seems to be more accurate, safe and recommendable in our actions. And that is what effective risk management is all about. Risk management is the art to professionally anticipate risks and opportunities and safely sail through stormy seas. This requires a serious way of dealing with uncertainty. If we know very little, we should not presume that we can label a risk with a price tag or an exact probability.

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