Pricing Risk

“Pricing” risk means, in part, assessing the probability of some sh*tty outcome.

Like, “Well, Baggins, what are the chances that…

  • interest rates move against us?”
  • the company defaults on its debts?”
  • a chain reaction based in the debts of South Asian government borrowing triggers a worldwide fear of Russian default, thus causing a prolonged period of high volatility that nearly wipes out the American financial sector because of a single highly-leveraged hedge fund run by Nobel laureates?”
  • you make me a mustard sandwich?”

It means more, though, because of risk aversion, loss aversion, and the interaction of one investment with others.

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