Introduction to Risk (exam 1)

Example of Reputation Risk:

American car companies ignored the constant onslaught from the likes of consumer reports and foreign car makers on their reputation. The day came when quality really wasn't a problem at all when it came to American cars, but many Americans don't want to purchase anything but a Toyota for reliability reasons

Unknown Risk

An unknown risk is ignorance. We have no idea that it even exists.

Vulnerability

Any weakness, process, act or physical exposure that renders something or someone susceptible to exploit by a threat

Risk management

Applying a risk framework to a problem Identification Assessment Prioritization Risk reduction Continual monitoring

Military

Battlefield Terrorism Physical Attack

Risk framework

A systematic, organized and disciplined process for evaluating risks.

Ignorance

Ignorance is an unknown risk. With an uncertain risk, we know that it is there, but it cannot be measured.

Definition of risk is?

The definition of risk is completely dependent on the context of its use

American law considers risk to be

The potential danger that threatens to harm or destroy an object, event, or person.

Different types of risk use

different definitions and utilize different frameworks

EPA 7 Cardinal Rules of Risk Communication

1 Accept and involve the public as a legitimate partner. 2 Plan carefully and evaluate your efforts. 3 Listen to the public's specific concerns. 4 Be honest, frank, and open. 5 Coordinate and collaborate with other credible sources. 6 Meet the needs of the media. 7 Speak clearly and with compassion.

4 Examples of Psychological Risks

1 cancer patients are a higher risk of having psych problems related to having cancer 2 Professional sports teams often evaluate potential players mental health to assure they will not be a distraction to the team. 3 The FBI wants to ensure sound psychological health before before handling field agents 4. airlines also need to keep track of pilots mental states

Environmental

Environmental damage Liability Physical Threat

Risk is a combination of the probability of an event and the consequences of that event. Example?

For example, if we flip a coin for $100, the probability of winning is 50%, and the consequence is a win or loss of $100.

Probability

How likely an event is to occur Tossing a coin 50/50 Rolling a six sided die 1/6

Psychological Risks

Individual mental health issues Impact of individual's mental health on the organization

Objective risk

It is the risk you actually get Best illustrated by example When rolling a 6 sided die a hundred times, you might expect a mean of 3.5. If you actually roll the die a hundred times, what distribution do you actually get around that 3.5?

Uncertainty

Knightian uncertainty, which is based upon economics, is a known risk that is immeasurable or not possible to calculate.

Legal/Regulatory risk

Often don't emerge until something goes seriously wrong Government might change the law or regulations which impact the business.

Information systems

Physical threats Intrusion

Speculative risk

Possibility of gain or loss Unlike pure risk, you might gain

Threat

Potential cause of unwanted impact to a system or organization.

Measuring or describing likelihood or extent

Quantitatively Qualitatively

Risk communication

Reduce the impact of consequences when events occur Reduce the overall level of risk of events that may or may not occur

Matschulat

Risk involves both chance and mischance. Things that might happen that might be good or might be bad.

Investors

Risk is the chance that an investment's return will be different than what is expected. For example, if you have investment that you expect to earn 8% on your money, there is risk that you might earn 6%, but there is also the risk that you will earn 10%.

Operational

Risks stemming from poor system design, bad management, internal fraud and human error. When a system or personnel in an organization might fail in some way, it constitutes an operational risk.

Strategic risks

Similar to but broader than "business" or "military" risks

Basic Components of Risk?

The likelihood of the event occurring The extent of the harm if the risk does occur

Dictionary definition of Risk?

The possibility of suffering harm or loss; danger. A factor, thing, element, or course involving uncertain danger; a hazard: "the usual risks of the desert: rattlesnakes, the heat, and lack of water". The danger or probability of loss to an insurer. The amount that an insurance company stands to lose. The variability of returns from an investment. The chance of nonpayment of a debt.

Risk assessment

The process used to identify risk, threats, vulnerabilities and consequences.

Consequences

The result that may arise from a risk. What damage will be sustained if the risk comes to pass?

Pure risk

There is either no loss or there is. This means that there is no chance of gain

Financial

Type of risk: Market risk Interest rate risk Foreign currency risk Commodity price risk Credit risk Liquidity risk

Any time you read something about risk you should make?

a careful note of the definition of risk as the author uses it.

Business risks

business risks are everywhere and everything in business: Making a product Selling a product Controlling external suppliers Quality control Competitors actions

Risk means more things

can happen than will happen.

The computer desktop encyclopedia

defines it as the expectation of a loss as a function of the probability and consequences of harm.

Example of Speculative Risk

gambling stocks and bonds

Example of Operational Risk

if you run your own ice cream stand you have an operational risk of one of you employees stealing from you when they sell ice cream

Reputation Risks

if your company has a poor reputation it maybe difficult to recover.

Physical

is extremely broad it entails everything from stopping the theft of laptops to building security to protecting important people such as the president

Liquidity risk

is in part what lead to the banking meltdown of 2008- 2009. if you have an asset worth a million dollars you would expect to be able to sell that asset for a million dollars if you needed money for something. However, if there is no liquidity, then you might be unable to sell the asset for anything close to a million.

Credit Risk

is incurred when one party loans to another party. when one party loans money to another there is a possibility the money will not be paid back.

Market Risk

is the risk that the value of an asset might go up or down based on the markets perception of its value.

The word risk comes from the Italian word

risicare, which means to dare.

Terrorism

suicide bombers, car bombs, and aircraft hijacking. Our job now is to come up with the most creative ways terrorist might attack us. The United States failed to do before 9/11 Physical Attack

Example of Legal/Regulatory risk

suppose you run a rehab hospital and congress decides to cut medicare payments to you. this will have a major impact on your business

Example of Strategic risks

the emphasis that american car manufacturers place on large SUVs. When gas prices went up and SUVs stopped selling GM and Chrysler . It is much more complex then this though

Risk is a combination of

the probability of an event and the consequences of that event.

Statisticians define risk as

the probability of an undesirable outcome.