Laplace

*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc/*

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Pierre Simon Laplace was a physicist, astronomer, mathematician and as we
will discuss a philosopher who lived from 1749 – 1827.  Many readers of
this blog will of course know of Laplace through their study of Laplace
transforms in university.

For the general public, Laplace is probably better known for his thought
(which I am paraphrasing) that, if he knew the position and momentum of every
particular on earth, and if he had enough calculating power, then he would be
able to completely determine the future of the world.

That is a very profound statement, and it brings up all sorts of questions
about free-will and in part is responsible for Einstein's famous comment
that (again paraphrasing) "God does not place dice".

I believe that philosophy is best left to discussions in bars while you are
waiting for the game to start.  However as you start your day, the thought
of Laplace's does give you pause.  My point for this blog – a blog
supposedly about risk management – is does Laplace's comment give us
pause in risk?  In other words, aren't many of us implicitly going around
trying to manage risk so as to be able to completely determine the future
outcomes of the organization (or at least the downside outcomes)?  Are not
the regulators also implicitly making the same assumptions (having the dream
of a predetermined and thus risk free world) with the imposition of each new
regulation?  Don't most risk managers dream of a world like Nirvana where
every risk can be pre-determined and controlled?

Perhaps it is time we explicitly checked what we think about Laplace's
conjecture a bit more before we set our risk management goals.


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