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.