Setting your Borel Point
What is a Borel Risk Point you ask? Emile Borel once said
“Events with a sufficiently small probability never occur”.
Your Borel Risk Point (BRP) is your definition of “sufficiently small probability” that causes you to ignore unlikely risks.
Chances are, your BRP is set at much too high of a level of likelihood. You see, when Borel said that, he was thinking of a 1 in 1 million type of likelihood. Human nature, that has survival instincts that help us to survive on a day to day basis, would have us ignoring things that are not likely to happen this week.
Even insurance professionals will often want to ignore risks that are as common as 1 in 100 year events. Treating them as if they will never happen.
And in general, the markets allow us to get away with that. If a serious adverse event happens, the unprepared generally are excused if it is something as unlikely as a 1 in 100 event.
That works until another factor comes into play. That other factor is the number of potential 1 in 100 events that we are exposed to. Because if you are exposed to fifty 1 in 100 events, you are still pretty unlikely to see any particular event, but very likely to see some such event.
Governor Andrew Cuomo of New York State reportedly told President Obama,
New York “has a 100-year flood every two years now.”