She noted that since the 17th century risk had come to mean the probability of an event occurring, combined with the magnitude of the gains and losses. The analysis of risk as probability became deeply entrenched in modern science, manufacturing, and philosophy. In sharp contrast, and to Douglas' dismay, risk in popular culture and political discourse had simply come to mean danger, and high risk a lot of danger. A divide also runs through the world of money. Professional money managers define risk as volatility, fluctuations in the value of portfolios around a benchmark index, says Byron Wien, investment strategist at Morgan Stanley.
Money managers live in a world of performance where total return is the favored standard.
What's more, the future may be volatile, but history quantified maps out the general direction of financial returns. Individual investors, however, define risk as the chance of taking a loss, and big risks as big losses. The reason is individual investors live in a world where securities are eventually sold to pay for retirement, to fund a college education, to financially survive a corporate downsizing. The future is murky, and history is a story of unexpected outcomes, bad timing, and tectonic shifts. The definition of risk as volatility and risk as a step down in living standards is very different.