Objective Risk Assessment

Abstract

Since no bank, let alone any individual, possesses any method for objectively assessing the magnitudes of any of the risks, as discussed in the previous chapter, all bank investment and funding activities inevitably involve subjective decision-taking. Nevertheless, an analysis of objective risk provides us with a useful framework for organising our thinking about its subjective counterpart. To appreciate this, let us consider the following hypothetical situation. A banker is faced with the possibility of making an investment with known probabilities as to the possible outcomes. The information available to him is summarised in Table 2.1.