2. Measuring Risk
There are two different approaches to measuring risk:
- Analytical or theoretical
- Empirical or experimental
The theoretical approach is based on probability theory and formal mathematical reasoning. On the other hand, the empirical approach uses data from controlled or uncontrolled experiments. While for clarity we discuss these two approaches separately in Sections 2.1 and 2.2, respectively, we are going to see that ultimately these two different approaches are mathematically equivalent. Empirical observations inform theoretical reasoning, and the empirical approach is based on theory.
