InvoiceFair Chairman Ivan Fox shares his unique perspective on risk - the move from games of chance to games of mathematical probability.
Herodotus is considered by many to be the first historian. Born in Halicarnassus around 490 BC, he visited Egypt during the Persian occupation. The second volume of his histories describes Egypt’s geography, people and recounts a few semi-mythical stories about pharaohs.
What I find amazing to comprehend, is that when Herodotus stood and gazed upon the Pyramids, they already been standing for 2,000 years. It is mind-bending to think that the Egyptians of that time had the mathematical sophistication to execute this mammoth undertaking with acute precision. Also that they are still standing today. I wonder how those Section 23 apartments will stand the test of time?
Overall when it came to the business of complex construction, humans had the mathematical capability early doors in history. In contrast, when it came to matters of uncertainty and the weighing of risk, humans literally went mathematically asleep for another 2,000 years.
Since the beginning of time, gambling and games of chance were popular. However, this gambling infatuation was driven by the idea of man pitting himself against the fates. Despite our early mathematical proficiency, no one thought of framing probability in terms of numbers.
Indeed the whole basis of Greek mythology is based on a game of dice between three brothers. They rolled the dice for the division of the universe. Zeus won the heavens, Poseidon the sea and Hades came last and was left with the underworld. Although he did hold a toll concession across the Styx.
This colossal game of dice solidified the belief that uncertain outcomes were simply in the lap of the Gods. Humans engaged in an array of bizarre practices to influence them and therefore turn fate in their favour. Every manner of animal butchery and disembowelment took place over the years. Entrails, innards and salt were scattered all over the place.
Only in the medieval period, were tools developed to assess uncertainty and risk. Gerolamo Cardano, an Italian lawyer, physician and friend to Leonardo da Vinci, liked to gamble. In order to try and maximize his winnings, he began to investigate the basic concept of probability when throwing dice.
His work would prove incredibly important just over a century later, in the mid-1660s, when Blaise Pascal and Pierre de Fermat defined a method for calculating probabilities. This development enabled forecasting with gambling once again as the driving force. While in games of chance the outcome of an individual trial cannot be predicted with certainty, the mathematicians said collective results over a long period of time display a certain regularity.
This regularity became the cornerstone of all risk modelling and the basis of the modern insurance industry.
As we continue to move further into the world of big data and artificial intelligence, risk products such as insurance can be more accurately priced to an individual risk profile. For example, a black box can be put in your car to monitor driving behaviour and mileage. Your policy becomes bespoke priced in risk terms rather than just being placed in risk bucket. The ex-nun from Clonmel driving twice a week to mass and bridge no longer has an unearned advantage. Via undisputable black box feedback, the insurance company can see that she is perpetually late for bridge and drives at speeds that would give formula 1 driver Jenson Button a run for his money.
In InvoiceFair our approach to pricing is price discovery via an online auction. Prior to being admitted to the “auction ring” assets have passed our comprehensive diligence. The evolution of technology will continue to refine our risk pricing going forward. The basic efficient pricing of an asset seeks to capture the available data and build a portfolio to mechanically tilt the odds in your favour. In my own experience, the decent throughput flow of assets to consider, will result in a profitable strategy
All this being said, superstition and sentiment remain powerful forces. I readily admit, over a long career in financial markets, to keeping a horseshoe in my desk drawer and a special stone in my pocket.
Finally, for the record I like goats. I think that they are lucky.
As always if you have a working capital problem to solve, don’t wait for signs from the universe, please contact InvoiceFair.