Awareness of Risk and 2008 Financial Crisis

Awareness of risk, an indispensable point in risk management, has been applied to many empirical studies like health control, natural disasters and financial collapses. Theoretically, had an awareness of risk been properly examined, pities, losses and hazards could be avoided to under a large number of circumstances. In practice, however, as has been indicated by many fiascos, selecting appropriate ideas in advance can be much harder than understanding the situation afterwards. Though from a scientific perspective, improvements could be made by modifying quantitative models, behavioural obstacles deeply-rooted in such a process constrain its effectiveness. The rest of the passage will try to illustrate the hidden effects of human behaviours on awareness of risk during 2008 financial crisis. This catastrophe emphasizes again that though objective analysis and technical refinements could have led improvements beforehand, it is behavioural and psychological factors that worth greater attention to.

The 2008 Financial Crisis seemed to come out of blue and shocked the whole world in the first place but was soon concluded by experts as the consequence of systemic risk. (Federal Reserve Bank of Atlanta, 2009) Characterizing such a risk are three viewpoints, first, universal losses triggered by a single event (IBS, 2001), second, revelation of hidden correlations among financial institutions (Kaufman and Scott, 2003), and third, occurrence of a less optimal transition from one equilibrium to another (Hendricks, 2009). This discovery also drew attention to previously hidden risks and therefore increased perception of investment risks on an individual basis (Roszkowski and Davey, 2010). Meanwhile, for regulators and organizations, the focus shifts to correlations between counterparts from risk control as individuals, which can be demonstrated shown by recent regulations in Basel