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  • Essay / Risk awareness and the financial crisis of 2008 - 1874

    Risk awareness, an indispensable point in risk management, has been applied to many empirical studies such as health control, natural disasters and financial collapses . Theoretically, if risk awareness had been properly considered, pities, losses and dangers could be avoided in a large number of circumstances. In practice, however, as many fiascos have shown, it can be much more difficult to select the appropriate ideas in advance than to understand the situation afterwards. Although from a scientific perspective, improvements could be made by modifying quantitative models, deep-rooted attitudinal barriers to such a process limit its effectiveness. The rest of the passage will attempt to illustrate the hidden effects of human behavior on risk awareness during the 2008 financial crisis. This disaster once again highlights that even if objective analysis and technical improvements could have led to improvements prerequisites, it is the behavioral and psychological factors which deserve greater attention. The 2008 financial crisis seemed to come out of nowhere and initially shocked the whole world, but it was soon concluded by experts due to systemic risk. (Federal Reserve Bank of Atlanta, 2009) This risk is characterized by three perspectives: first, universal losses triggered by a single event (IBS, 2001), second, the revelation of hidden correlations between financial institutions (Kaufman and Scott , 2003) and thirdly, the appearance of a less optimal transition from one equilibrium to another (Hendricks, 2009). This finding also brought attention to previously hidden risks and thus increased perception of investment risks on an individual basis (Roszkowski and Davey, 2010). Meanwhile, for regulators and organizations, the focus is now on the correlations between risk control counterparties as individuals, as recent Basel regulations show.