Virgin vs. Experienced Risks

Introduction Every day we face a multitude of risks. Some we have experienced before; some we have not. Some we have contemplated; others have never crossed our mind. In this essay, we define four types of risk based on these two dimensions: whether or not they have occurred and whether or not we have contemplated them. These four classes of risks are shown in Figure 1. Individual and societal responses to these four types of risk will vary in predictable ways. Here, we focus on individual, institutional, and societal learning about a risk following the occurrence of an extreme event. Most of our analysis will be addressed to virgin and experienced risks, those falling in the upper-left and lower-right hand boxes. Virgin risks are those risks that we have never experience and have also never considered. For an individual, a car crashing into their living room is likely a virgin risk. Even if a few individuals foresaw trouble in the mortgage market, for society, the September/October 2008 meltdown in securities markets, with major financial firms going under, was the occurrence of a virgin risk.