I just came across this fabulous excerpt from a famous (infamous) press briefing – I remember first time I heard it in TV but had happily forgotten all about it. That is, until now.
As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don’t know
We don’t know.
—Feb. 12, 2002, Department of Defense news briefing
Is this not what risk and risk management is all about? In particular when it comes down to systematic risk and major economic meltdowns of the sorts that we’re going through?
We know that there are ‘bad apples’ out there - market players who venture too far into gray areas of the economy creating incomprehensible investment vehicles and risk management tools. And as long as it stays contained to one or two companies we (small investors) can deal with it through low-cost passive investments, diversification and proper asset allocation. The problem is when investment vehicles become so sophisticated that even the inventors (the “smart” people) can’t comprehend the impact that these vehicles have on the economic system as a whole … unknown unknowns … who knows what else we don’t know!