probability has this as one of its central concepts. cardinal probability is quantifiable : the probability of heads in a coin flip is 50 per cent. ordinal probability is qualitative : for example, ( as much as it pains me to say it ), collingwood are more likely to win the premiership this year than carlton. how much more likely they are to win, i couldn ’ t tell you exactly. modelbased risk management handles cardinal probability a lot better than ordinal probability. in the period prior to the onset of the crisis, hubris developed in parts of the financial sector, and in the investor community more generally, that everything could be precisely measured and priced. in particular, that risk was always quantifiable. to some extent, in the narrow see skidelsky ’ s discussion in keynes, the return of the master. see cagliarini and heath ( 2000 ) on the effect of knightian uncertainty on monetary policy. sense, that is correct because, as just described, i see measurability as the key distinction between risk and uncertainty. but risk assessment needs to take account of both risk and uncertainty. i am not saying that the quest for improved measurability was misplaced. there was a lot of progress made in better understanding the way financial markets operate and enhancing the technology of risk assessment. the problem was that the management of risk proved to be too narrow. the focus tended to be on things that were quantifiable ( cardinal probabilities ) to the exclusion of those which were not. some risks were treated as cardinal even though they were actually ordinal. some risks, such as liquidity risk and roll - over risk were neglected. moreover, the risk assessment was often based on too short a history that did not include a set of observations relevant to the events that were unfolding. comfort was taken in the precision of the measurement without thinking enough beyond the measurement. that is, not enough judgement was exercised. indeed, it seems to have often been turned off. a key question to ask is : could it have included a relevant set of observations, or were the events of the past three years unpredictable, too uncertain? that is a question i will come back to shortly. i don ’ t want to get too rumsfeldian here, but an important element of risk management is to know what you don ’ t know. 3 ( although mark twain might beg to differ : “ it ain ’

glenn stevens : economic conditions and prospects, october 2005 address by mr glenn stevens, deputy governor of the reserve bank of australia, to the tasmanian chamber of commerce and industry business dinner, hobart, 11 october 2005. * * * it is nice to be in hobart and i thank the tasmanian chamber of commerce and industry for the invitation. it is now a couple of months since the bank released its most recent quarterly assessment of economic conditions, at which time some of our staff paid one of their regular visits to tasmania to consult with local businesses. so i intend to offer a brief instalment in the unfolding narrative of the economy, with the benefit of an extra couple of months'information. of course, a few weeks from now we will release our next full statement on monetary policy. i won't try to preview that in detail, but rather pick on one or two issues of note. i'll begin with the world economy. the world economy graph 1 the year 2005 is turning out to be another pretty good one for global growth. in its recent world economic outlook released during late september, the imf estimates growth in 2005 to be about 4¼ per cent. that is lower than in the preceding year, but 2004 was exceptional : in that year, we saw the fastest global growth in three decades. at this point, 2006 is thought likely to be another good year, though that forecast would be sensitive to events in the next few months. the us economy continues to expand at a good pace. the recovery from the dot - com - bust recession of 2001 has been quite strong, notwithstanding periodic talk about'soft patches '. the us now, once again, stands pretty close to full employment. the us central bank, having been prepared to lower short - term interest rates dramatically to alleviate the downturn, is now well advanced in the process of returning them to normal, as they must if the economic expansion is to continue for an extended period. meanwhile, china has continued to grow rapidly, despite fears of a slump at various stages. japan – for years a dragging anchor on global growth – has posted some better numbers over the past year or so, and the debilitating effects of asset price deflation and balance sheet deterioration may finally be starting to wane. japan looks more likely to be able to sustain growth now than at any time in over a decade. elsewhere in east asia, results are a bit mixed but in general show fairly healthy growth, though not at the pace seen