Risk

10 Key excerpts on "Risk"

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  Raising Entrepreneurial Capital

  • John B. Vinturella, Suzanne M. Erickson(Authors)
  • 2003(Publication Date)
  • Academic Press

    (Publisher)

  DEFINING Risk AND Risk MANAGEMENT Risk is a word that is used in many ways in the field of Risk management. Our definition is a simple one: Risk is the possibility of loss . What is required for Risk to exist? There must be a situation involving multiple possible outcomes, and at least one of the possible outcomes must be negative. For most persons, Risk is an intuitive concept. If you have resources that can be lost, then you face Risk. If you own property, that property can be destroyed by fire. That property might also have to be liquidated because someone won a liability judgment against you, and you had no other resources with which to satisfy that judgment. Risk has two well-recognized negative effects, the creation of uncertainty and the need to divert resources to offset possible losses (i.e., to create reserve funds). Risk also exists in several forms. Pure Risk involves only the possibility of loss . Pure Risk is a state of nature; it exists whether we do anything about it or even recognize its existence. Pure Risk usually relates to the occurrence of random events such as fires, hurricanes, workplace injur-ies, or ‘‘slip and fall’’ incidents involving customers. Speculative Risk involves the possibility of gain, as well as the possibility of loss . Speculative Risk includes gambling and business Risk. Unlike pure Risk, speculative Risk is not a state of nature. It does not exist until a human being makes a decision and takes an action (i.e., Risk is created). That action, the willing acceptance of Risk, is normally taken because of the potential gain. That is a prime motivation of entrepreneurs. Current thought divides busi-ness Risk into three categories: financial Risk, operational Risk, and strategic Risk. Each of those will be discussed later in this chapter. Risk management is the identification, analysis, and treatment of exposures to loss . Those exposures may involve either pure Risk or speculative Risk.

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  Operational Risk Management

  • I. Moosa(Author)
  • 2007(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  1 C H A P T E R 1 The Science of Risk Management 1.1 DEFINITION OF Risk In its broadest sense, Risk means exposure to adversity. The Concise Oxford Dictionary defines Risk to imply something bad, “the chance of bad conse- quence, loss, etc.” Webster’s defines Risk in a similar manner to imply bad outcomes, “a measure of the possibility of loss, injury, disadvantage or destruction”. Following the Concise Oxford Dictionary, Vaughan (1997) defines Risk as “a condition of the real world in which there is an exposure to adversity”. Kedar (1970) believes that the origin of the word “Risk” is either the Arabic word risq or the Latin word risicum. The Arabic risq has a positive connotation, signifying anything that has been given to a person (by God) and from which this person can draw profit or satisfaction. The Latin risicum, on the other hand, implies an unfavorable event, as it originally referred to the challenge that a barrier reef presents to a sailor. The Greek derivative of the Arabic risq, which was used in the twelfth century, relates to chance outcome in general. It may not be clear that what is given by God (according to the Arabic risq, which is always good) relates to Risk, a situation that is typically understood to imply the potential of something bad (or some- thing good) happening. However, what risq and Risk have in common is uncertainty of the outcome. There is no guarantee that risq would come, and if it does, there is no guarantee how much it will be. Likewise, Risk situations are characterized by the uncertainty of outcome (the word “uncertainty” is not used here in the formal sense it is used in the Risk literature, as we are going to see later). OPERATIONAL Risk MANAGEMENT 2 In his General Theory, Keynes (1936, p. 144) defined an entrepreneur’s Risk as the Risk arising “out of doubts in his own mind as to the probability of him actually earning the prospective yield for which he hopes”.

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  Simplifying Risk Management

  An Evidence-Based Approach to Creating Value for Stakeholders

  • Patrick Roberts(Author)
  • 2022(Publication Date)
  • Productivity Press

    (Publisher)

  Risk is usually characterised as a combination of the likelihood of an uncertain event tak-ing place and the impact (on relevant stakeholder groups) if it does. Risk is not a one-dimensional construct. In most situations different stakeholder groups will perceive Risk differently: man-aging Risk may require difficult trade-offs between the interests of different stakeholder groups. In common with other organ-isational tensions, potential conflict may be managed through a combination of local rationality and sequential attention to goals. Many different Risk measures have been used to capture these different Risk perspectives: in many situations, multiple Risk measures will be required. Risk measures constructed from market data have the advantage of being forward-looking and being able to be updated frequently, but can only be applied to publicly listed companies. What Do We Mean by Risk? ◾ 19 In determining how to manage Risks it is important to dis-tinguish between value-adding Risks taken voluntarily in the pursuit of achieving higher returns and passive Risks that are merely accepted as a cost of doing business. References Bernstein P, 1996, Against the Gods: The Remarkable Story of Risk , New York, NY: John Wiley & Sons. Chittenden J, 2006, Risk Management Based on M_O_R: A Management Guide , Zaltbommel: Van Haren. Cyert and March, 1992, A Behavioral Theory of the Firm , 2 nd Edition, Malden, MA: Blackwell. ISO, 2002, ISO/IEC Guide 73 – Risk Management Vocabulary , Geneva: International Organization for Standardization. Kahneman D and Tversky A, 1979, Prospect Theory: An Analysis of Decision Under Risk, Econometrica , 47: 263–291. Knight F, 1964, Risk, Uncertainty and Profit , New York: Century Press. (Originally published 1921). March J and Shapira Z, 1987, Managerial Perspectives on Risk and Risk Taking, Management Science , 33(11): 1404–1418. Markowitz H, 1952, Portfolio Selection, Journal of Finance , 7: 77–91.

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  Winning With Risk Management

  • Russell Walker(Author)
  • 2013(Publication Date)
  • WSPC

    (Publisher)

  Unfortunately, there is little we can do about the biases and contamination that impact our outlook other than to constantly and diligently look for new and disconfirming information. Challenging our assumptions and outlook about Risk is not only the most important step in managing Risk, it may be the most difficult because of our biases.

  Complexity and unpredictability

  Aside from contending with one’s biases, business managers must be cognizant of other aspects of Risk, including its complexity in how it impacts the enterprise. We may think of this as the “path of the Risk.” Risks in business are multi-dimensional and may show relationships and interdependencies with other Risks, meaning that the ability to measure a Risk (or understanding its impact on the business) is limited by the information available at a point in time and the ability to comprehend the complexity of the Risk. The complexity of the Risk may overwhelm the ability to predict the outcome, resulting in distaste for the Risk by the business. That which is unknown to the business may be considered a Risk. However, as Knight demonstrated, Risk may be reduced where information and understanding can unravel the uncertainty. In business, uncertainty is common in complex systems. With a movement to greater globalization, interconnectedness, and reliance on automated systems, we can expect greater complexity in business. In many businesses where unraveling the complexity is difficult or impossible, this complexity will be viewed as a Risk. Developing an understanding for the complexity is tied to understanding the path and nature of the Risk, not simply its statistical properties.

  Opportunity to control or influence

  A better understanding of an identified Risk often leads one to think that a Risk can be influenced by certain actions or investments. If the Risk cannot be managed or mitigated, hopefully it can be better understood, allowing for more efficient investments. The ability to bring information to a Risk decision suggests that learning and discovery are at the core of improving a business’ Risk position. The Risk manager, therefore, looks for information to confirm the hypothesized understanding of the Risk and how it is realized in the business. This is the natural approach to identifying the Risk that is most attractive to take.

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  Managing Risk in Organizations

  A Guide for Managers

  • J. Davidson Frame(Author)
  • 2003(Publication Date)
  • Jossey-Bass

    (Publisher)

  People launch and 177 Q run businesses to make money. In general, if they enter into a safe business—for example, running an established convenience store— they are not likely to make great incomes, but neither are they likely to lose much. If they develop a technology breakthrough, they have a chance to make a fortune, as well as an opportunity to lose their life savings. All decisions that businesspeople make are Risky to some extent. For example, each time you hire new employees, you are taking a Risk. There are no guarantees that you have made a good choice. What if the employee does not work out? What if he can’t follow instructions and continually makes errors in doing his job? Hiring employees can be expensive. If ultimately they are fired after several unsatisfactory months, crucial work has not been done and you find yourself back at square one. As another example, advertising a new product in the newspaper can be expensive, and there are no guarantees that it will generate revenue. Will your $10,000 advertisement reach the cus- tomers you are targeting? What if the ad is buried in the back pages of the newspaper? What if it does not generate even one customer inquiry? Business Risk can be visualized in different ways. The approach taken here is captured in Figure 10.1, which shows business Risk as 178 MANAGING Risk IN ORGANIZATIONS Operational Risk Market Risk Financial Risk Regulatory Risk Project Risk Business Risk Figure 10.1. Principal Components of Business Risk. comprising five components: market Risk, financial Risk, operational Risk, project Risk and regulatory Risk. Market Risk All businesses that sell goods and services are concerned with market Risk. Market Risk is captured in the following basic question: When we put a product into the marketplace, will it sell? Clearly, this issue is of utmost concern to companies that introduce new products. The prob- lem with new products is that they have no track record.

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  Understanding Risk

  The Theory and Practice of Financial Risk Management

  • David Murphy(Author)
  • 2008(Publication Date)
  • Chapman and Hall/CRC

    (Publisher)

  One starting point is a regula-tor’s definition:* The Risk of direct or indirect loss resulting from inadequate or failed internal processes, people, and systems or from external events . . . strategic and reputation Risks are not included . . . but legal Risk is. Faced with this definition, one can sympathise with the earlier term other Risks for this Risk class. Operational Risk loss can be categorised under the following (overlapping) categories: Internal and external fraud . Some person or persons either inside the organisation or outside it, or both, have broken regulations, laws or company policies and losses resulted. Insider trading and theft typically come under this category. Employee practices and workplace safety . These are losses arising from failure to implement required employment practices and include losses under discrimination suits and workers’ compensation. Loss of or damage to physical assets . Natural disaster, act of God and terrorism losses come under this category. Some events in this category—such as fire damage—may be insurable. Clients, products and business lines . Here losses arise from failure to engage in correct business practice, for instance, via unsuitable sales to clients, money laundering or market manipulation. Business disruption, system or control failures . These include all hardware-, software-, telecom- and utility-failure-related losses. * See the operational Risk section of www.bis.org/bcbs/ . • • • • • Markets, Risks and Risk Management in Context ■ 45 Execution, delivery and process management . This is a wide category including data entry issues, collateral management, failure to make correct or timely regulatory or legal disclosures, and negligent damage to client assets. Clearly, both within operational Risk and between it and other Risk classes, there are, how-ever, many definitional ambiguities.

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  Project Management Concepts, Methods, and Techniques

  • Claude H. Maley(Author)
  • 2012(Publication Date)
  • Auerbach Publications

    (Publisher)

  Examples of external Risk, organized by category, include the following: Unpredictable Regulatory changes Natural hazard Predictable but uncertain Market changes Inflation 5.2.4.3 Exercise—Influences on Your Current Project Draft the internal and external influences to your current project and the assumptions that have been made and validated. 5.3 TERMINOLOGY 5.3.1 Risk Event A Risk is the occurrence of a particular set of circumstances and is com-posed of three basic components: • A definable event—threat or opportunity • Probability of occurrence • Consequence (impact) of occurrence A Risk event is often described as follows: IF Conditional statement (allowing probability to be assessed) THEN Statement (describing the consequence which can be assessed) Risk Management • 207 5.3.2 Uncertainty Uncertainty is a representation of the possible range of values associated with either (1) a future outcome or (2) the lack of knowledge of an existing state. Uncertainty can be expressed as a deterministic quantitative value (i.e., a single number), a qualitative value (high, low, medium, etc.), or as a probability distribution (i.e., a range of quantitative values and the likeli-hood that any value in the range will occur). 5.3.3 Threats and Opportunities Threats are Risk events that, should they occur, will cause negative effects to the project’s objectives. These are defined during the identification step of the project Risk management process. Measures need to be taken to reduce their probability and/or impact. Opportunities are Risk events that, should they occur, will bring positive effects to the project’s objectives. These are defined during the identifica-tion step of the project Risk management process. Measures need to be taken to increase their probability and/or impact. 5.3.4 Probability Probability is the likelihood that a Risk event will occur.

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  Risk Management and Simulation

  • Aparna Gupta(Author)
  • 2016(Publication Date)
  • CRC Press

    (Publisher)

  If Risk is the variability in future happenings that can be quantified in terms of probabilities, one distinction is needed in terms of subjective and objective probabilities. Each one of us, based on our beliefs, historical data and evidence can have a subjective view of probabilities of future outcomes. These are sub-jective probabilities. Objective probabilities are those that can be backed with observational evidence, not just subjective estimates. The objective probabil-ity assigns a likelihood for an event to occur based on an analysis of recorded observations and data. Unavailability of relevant or insufficient data can often result in the boundary between objective and subjective probabilities to be-come rather thin. We will need to bear this in mind and visit this distinction where relevant. Management of Risk, and for that matter uncertainty, in any context re-quires understanding the sources for this Risk. A full grasp of the sources of Defining Risk 5 Risk is greatly helped if the Risks are classified by a meaningful taxonomy. In the next section, we will develop a structure of additional definitions to support developing this taxonomy of Risks. 1.1 Types of Risk Studying Risks in a specific context requires understanding the context and identifying quantities to observe to develop a measurable quantification of the Risk. In our context, the impact of Risk will uniformly be measured in financial and/or monetary terms, although sometimes assigning a financial measure to a Risk becomes extremely tricky. For instance, what is the right financial/monetary value of a life of a 10-year-old killed by an intoxicated, reckless automobile driver. For the management of Risks even such tragic events must be evaluated, and the financial/monetary value assigned will end up depending on from whose perspective the assessment is being done.

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  The Practice and Theory of Project Management

  Creating Value through Change

  • Richard Newton(Author)
  • 2019(Publication Date)
  • Red Globe Press

    (Publisher)

  Risk may stop one or more of deliverables being created, changes being implemented or ben-efits being realized. In some situations, a project may still finish with the planned outcome though a Risk occurs, but it means the project does not conform to the expected constraints. The project may be late, it may spend more money or use more resources than expected, or the quality may be lower than required. Risk may impact any project success criteria. In the end, Risk is about the likeli-hood that a project will not be a success. But not being a success means different things to different stakeholders (see Chapter 7). It may mean not meeting time and budget, or not achieving the business case. It can be other success criteria, such as not meeting stakeholder satisfaction or not achieving a goal such as increased skills in an organization. 312 The practice and theory of project management Risk within a project can spill across into other projects. Organizations have limited resources. Any financial overspend or additional time worked on a project by scarce resources resulting from unpredicted Risk has to have an effect some-where else in a business. Usually this is on other projects. If a project overspends there is less money for other projects. If a project is late, then other projects using the same resources will start later. If a project does not deliver its full scope and some requirements are missed, then another project may have to have its scope expanded to fulfil the missing requirements. Moreover, some projects are inter-dependent. Where there is a dependency between projects, one project can only progress or end upon completion of some actions by another project. This is particularly common with projects in a programme. If a project is subject to a Risk which is realized, and so does not com-plete, this will have a knock-on impact on any dependent projects.

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  Enterprise Risk Management

  From Incentives to Controls

  • James Lam(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  Companies can be much more certain about potential losses in the credit card business—and prepare for them better—than they can in the commercial real estate business. Like exposure, volatility has a specific, quantifiable meaning in some ar- eas of Risk. In market Risk, for example, it is synonymous with the standard deviation of returns and can be estimated in a number of ways. The general concept of uncertain outcomes, is, however, useful in considering other types of Risk, too: a spike in energy prices might increase a company’s input prices, for example, or an increase in the turnover rate of computer programmers might negatively affect a company’s technology initiatives. Probability How likely is it that some Risky event will actually occur? The more likely the event is to occur—in other words, the higher the probability—the greater the Risk. Certain events, such as interest rate movements or credit card defaults, are so likely that they need to be planned for as a matter of course and mitigation strategies should be an integral part of the busi- ness’ regular operations. Others, such as a fire at a computer center, are highly improbable, but can have a devastating impact. A fitting prepara- tion for these is the development of back-up facilities and contingency plans that will likely be used infrequently, if ever, but must work effec- tively if they are. 34 ENTERPRISE Risk MANAGEMENT Severity How bad might it get? Whereas exposure is typically defined in terms of the worst that could possibly happen, severity is the amount of damage that is actually likely to be suffered. The greater the severity, the higher the Risk. Severity is the partner to probability: if we know how likely an event is to happen, and how much we are likely to suffer as a consequence, we have a pretty good idea of the Risk we are running. Severity will often be a function of other Risk factors, such as volatility.

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