RMI Exam 2 Who uses decision making IndividualsOrganizationsGovernment Individuals use expected Utility Organizations use expected Value What is Bias an inclination of temperaments or outlook to present or hold a partial perspective at the expense of alternatives in reference to objects people or groups Types of Bias 1 Age biases people in certain age groups tend to interpret information about risk differently2 Cultural biases certain culture view of risk differ example religion biases 3 Experience biases people who have experienced a low probability high consequence event tend to overestimate its likelihood people who have not experienced one tend to underestimate example control biases 4 Gender biases these are not systematic you cannot say all men or all women think a certain way 5 Media biases risks that garner a lot of media attention murder terrorism kidnapping etc are typically overestimated while other risks car accidents health risks tend to be underestimated What is CAPM The Capital Asset Pricing Model only reward systemic risk and not worried about diversifiable risk What is Efficient Frontier a graph that shows the tradeoff between risk and reward The Efficient Frontier line represents the optimal combination of risk and return What is an incentive something that motivates individuals to perform an action What are the types of incentives 1 Financial expect some form of material reward in exchange for acting in a particular way 2 Moral do the right thing 3 Natural curiosity fear anger pain joy pursuit of happiness 4 Coercive negative reinforcement5 Personal motivate an individual through their tastes desires and the ambition to achieve remarkable feats 6 Social takes into account the situation faced by any individual in a given position within a given society by taking into account practices rules and societal norms 7 Political effect the Short Term Planning which is the opposite of what we want our government to do We want them to think Long Term What is the Study of Economics is basically a study of incentive systems The Law of Unintended Consequences outcomes that are not the ones intended by a purposeful action Someone will cheat the game Different individual risk management levels 1 Property2 Liability 3 Life Premature Death Long Life4 Health5 Financial What is lost exposure any condition or situation that presents a possibility of loss regardless of whether that loss actually occurs What are the three elements to a loss exposure 1 Asset exposed to loss2 Cause of loss3 Financial consequences of the loss What are the different types of damages GPS1 General Damages someone lost income because you hurt them and they cannot work due to the injury 2 Punitive Damages punishment to make sure you don t do it again People use this as a way to cheat the system and get a lottery ticket to receive money 3 Special Damages harder to quantify loss of consortium wife sues you for killing her husband pain suffering permanent back damage Specific Types of Liability 1 Property owners2 Automobiles3 Employer employee this relationship doesn t stop when you leave work the employer is liable for employee s actions 4 Parents and children5 Animals Individual Risk Management Risk Management Process 1 Determine Objectives2 Identify Risks3 Evaluate Risks4 Choose your alternatives5 Implement6 Review Evaluate In which age category do you face the highest risk of premature death your 40s Types of Risk for Corporations Business risk Operational risk Hazard risk Financial risk Strategic risk Legal risks Liability risks IT risks Reputational Risk our professor includes this risk under strategic risk Business Risk Deviations in profitability This is a very broad category of risk that is caused by operational hazard financial or strategic risks Operational Risk Potential losses from internal sources Manufacturing processes Fraud Mismanagement Employee mistakes Hazard Risk describe potential losses that only have a down side pure risks Peril the immediate cause of loss Hazard condition of affecting the frequency or severity of loss They affect perils Financial Risk Potential variation due to financial causes Strategic Risks potential losses variation from poor business decisions o Product mixo Supplier choiceo Financing optionsEX Business Location Theme cases of BP cases CCPPW1 Corporate Strategy2 Corporate Culture3 Public Relations4 Process Management5 Workplace Safety Who became CEO of BP in 1995 Lord Browne Rebranding BP 1 Environmentally friendly oil company2 Health Safety Environmental HSE Performance workplace safety 3 Growth through M A mergers and acquisitions 4 Green Company Started thinking about Alternative Fuels Main Incidents of BP 1 Explosion at Texas City refinery2 Oil Spill at Prudhue Bay Baker Report 10 recommendations ALL PROCESS SAFETY Big Data and problems Big Data uses past information to predict future occurrences The problem is that things are changing very quickly and in some instances past experiences are not a good predictor of what is going to happen in the future Behavioral Analytics the study of big data to predict behavior What is a black swan risk An extreme outlier high impact hard to predict rare events that generally people don t expect For example The Bernie Madoff Ponzie Scheme took people s money to invest it but lied and really pocketed it mortgage crisis Data Farming allows us to identify and assess various levels of operational risks and provide a road map for implementing solutions to mitigate the risks What percentage of business loss can be attributed to operational risk 30 What was not a primary cause of BP s March 2005 accident Overworking employees Which investigative body concluded that BP endangered workers to cut costs US Chemical Safety and Hazard Investigation Board CSB What type of risk does Dr Nyce not consider it s own category of risk Reputational risk What type of integration best describes the type of organization BP is Vertical What was not included in BP s corporate strategy Growth through hostile takeovers The people processes and systems in place to produce the company s products service describe what category of risk Operational risk Definition of strategic risk mistakes in strategy Financial Crisis 1 The global financial crisis was a failure of risk management 2 Strategy and the lack thereof played a large role Strategic risk played a role but was not the primary driver of the crisis Fannie Mae Freddie Mac government sponsored secondary
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