Defining Risk as Volatility in the Financial Literature
Definitions are not generally wrong. But in technical subjects they can differ greatly from common use, and it can be genuinely wrong to think the technical definition "captures" the common one when really it has simply given a word a very different meaning in the technical subject. Consider how risk in finance is often defined as the variance of returns. This is not wrong, but is hardly synonymous with everyday use. Let's I am in a car going over a cliff. If I do nothing, I am dead for sure. But if I leap out, there is a 20% chance I will live. In ordinary talk, we'd say the first option is riskier, since we usually talk of risk as the chance a bad result will occur. But in finance theory, it is jumping out that is risky: it makes the predicted variance of return higher. And so in auction theory : bidding higher definitely increases the chance of losing money, so in ordinary speech we'd call a bidder "cautious" who makes low bids. But the varianc...