It’s been a wobbly week in the world of finance. AIG—bailed out! Lehman Brothers—bankrupt! Marty’s Shoes—out of business! But, as Charlemagne famously observed, “you roll your dice, you move your mice,” a reminder that the theories behind financial derivatives have a longer pedigree than we often give them credit for. In fact, scholars are currently debating how medieval people assessed, managed, and diversified risk.
First, check this out: in June 2007, the Electronic Journ@l for History of Probability and Statistics devoted an entire issue to “medieval probabilities.” Contributors to the issue explore the medieval roots of the theories and applications of the risk-management industries of later centuries, finding that
[t]he writings of some late XIIIth or XIVth Century Franciscan theologians provide the most interesting place for such discussions. In their view, the aleatory element of a commercial contract could be evaluated in its own terms, and possibly sold separately.
According to another article, which discusses late-medieval maritime insurance, the merchants who underwrote sea voyages didn’t have a statistical basis for evaluating risk, but they did base insurance premiums on such factors as the ship, its captain, the distance of the trip, the season, and the type of cargo. Interestingly, Giovanni Ceccarelli finds that the 16th-century underwriters of one French merchant ship were sensitive to ways that changes to contracts might damage the insurance market as a whole; he also finds that the use of coinsurance, exemption clauses, third-party reassurances, and temporary partnerships meant that “businessmen could rely on a wide range of multi-faceted instruments that allowed a flexible strategy of risk diversification.” Ceccarelli is the author of an entire book about how medieval people became increasingly sophisticated about games of chance until “‘risk’ ultimately became perceived as an ‘object’ that could be commercialized and quantified in economic terms.”
On a side note, there’s currently an active scholarly debate about how medieval people used land to mitigate risk. A 2001 article in Explorations in Economic History suggests that medieval peasants managed risk through land accumulation, and that scattered fields made land “a divisible savings instrument.” Others disagree, contending that landowners became downwardly mobile when they sold off small parcels or that some medieval farmers mitigated risk by joining farmers’ cooperatives.
Are you yawning yet? I hope not; even if, like me, you only dimly understand economic history, you should be able to appreciate these glimmers of medieval ingenuity, belying as they do the lingering modern smugness about the past in general and the Middle Ages in particular. As it turns out, the complicated financial derivatives that are making the market go all higgeldy-piggeldy in 2008 are based on the idea that abstractions like risk can be bought and sold—a concept medieval people, too, were sophisticated enough to understand.