You’re right—weather (or other time dependent related events) cannot be risk reduced on the moment.
But they can be risk reduced over time, by aggregation. I would be willing to sell ten thousand contracts “pay 1 if it rains this year”, one for each of the next ten thousand years. I would do this if we assume the yearly rains are somewhat independent, and that I have a good estimate of their likelyhood, allowing me to price the events reasonably. This, in practice, is stupid because of the ten thousand year delay. Alternatively, I could sell these contracts in 10 000 different locations on the planet—but they would not longer be even approximately independent.
So there are three limitations to reducing risk through aggregation:
1) Reasonable time scale for aggregation.
2) Establishing a reasonable level of independence in the contracts.
3) Calculating the probabilites correctly.
What most people call “systematic risks”, seem to fail one or more of these three requirements, and so can’t be easily risk reduced through aggregation.
You’re right—weather (or other time dependent related events) cannot be risk reduced on the moment.
But they can be risk reduced over time, by aggregation. I would be willing to sell ten thousand contracts “pay 1 if it rains this year”, one for each of the next ten thousand years. I would do this if we assume the yearly rains are somewhat independent, and that I have a good estimate of their likelyhood, allowing me to price the events reasonably. This, in practice, is stupid because of the ten thousand year delay. Alternatively, I could sell these contracts in 10 000 different locations on the planet—but they would not longer be even approximately independent.
So there are three limitations to reducing risk through aggregation:
1) Reasonable time scale for aggregation.
2) Establishing a reasonable level of independence in the contracts.
3) Calculating the probabilites correctly.
What most people call “systematic risks”, seem to fail one or more of these three requirements, and so can’t be easily risk reduced through aggregation.