The merchants of medieval Venice had a simple but effective metric for risk management. When sending ships out on trading voyages, they calculated their profit margins as follows: if we send out five ships, we can assume that four of them will be lost to pirates, storms, shipwreck and other perils. Therefore, we must ensure that the profit we make from the cargo carried by the fifth, surviving ship will cover the losses made by the destruction of the other four.
We find this notion often in letters and mercantile handbooks from the thirteenth century onward, and it can be assumed that this metric was in common use. It tells us a couple of things. First, business people of earlier times were well aware of risk. From the same sources we know of the elaborate measures they used to spread and lay off risk, diversifying their businesses into multiple business lines and different regions, using partnerships to spread the risk among many investors and so on.
It also tells us that the levels of risk that these men (and the very occasional woman) worked with were appallingly high, at least by our standards. How many of us today would invest in a venture where we knew that there was an eighty per cent chance that we would lose our investment. Yet our business ancestors did so almost as a matter of routine - largely because they knew they had no choice.
Read full article: Forbes, March 2, 2012