RMI 2302 Exam 1 1 Module 1 Risk Uncertainty regarding loss There are different magnitudes of risk based on the decision maker individual organization and society Danger does not equal risk Information does not alter risk There has to be at least one of the potential outcomes that are unwanted in order to be considered a loss According to The Scientific View of Risk there is another definition of risk the probability of a person suffering an adverse effect from some activity or exposure over a given period of time The time element can differ because statistics can change with time and vary with habits Risk is a probability and is expressed as a fraction or ratio of the number of people who experienced the adverse effect divided by the number of people who engaged in the activity Uncertainty When you do not know the outcome there is uncertainty Multiple outcomes can also lead to uncertainty Uncertainty is doubt about our ability to predict future outcomes Because uncertainty is subjective it can differ across individuals even when the risk is the same Information can alter uncertainty Reduction in uncertainty can be a good thing Ex an event such as a hurricane doesn t change the likelihood of another hurricane yet our uncertainty and biases about another one occurring are now present Loss what you could have had but don t can be considered a loss Individual Magnitude of Risk Q What is the definition of risk on the individual level A Uncertainty regarding loss Organization Magnitude of Risk Q What is the definition of risk on the organizational level A Uncertainty regarding loss and things that prevent the organization from reaching their objectives It adversely affects the achievements of an organization s objectives Note risk management in organizations applies to the entire industry Society Magnitude of Risk Q What is the definition of risk on the society level A Uncertainty regarding loss and things that effect society as a whole It has to effect a large portion of its constituents Note individuals and society have their own way of handling risk Risk Measurement 1 Frequency Likelihood how often is something to occur over what time frame How often something happens is usually compared to how many times it could have happened Think probability RMI 2302 Exam 1 2 2 Severity Impact how bad is it when it happens Severity is often measured in terms of financial loss We often measure the expected severity or what we expect the loss to be when it occurs 3 Expected Value Loss how often it occurs multiplied by how bad it is when it 4 Risk Profile way of prioritizing risks occurs Likelihoo d High Medium Low Impact Red Yellow Green Yellow Green Green Yellow Low Medium High Red Red Risk Likelihood Frequency the probability that a loss can occur This can be described as high medium or low a High an event is expected to occur in most circumstances b Medium an event will probably occur in many circumstances c Low an event may occur at some time Risk Impact Severity the potential effect that a loss could have if it arises The magnitude can also be described as high medium or low a High serious impact on operation reputation or funding status b Medium significant impact on operations reputation or funding status c Low less significant impact on operations reputation or funding status Q Risk prevention methods are best applied to what A Frequency of losses Q Risk reduction methods are best applied to what A Severity of losses Q Do risk reduction methods have costs that are both monetary and nonmonetary A Yes It requires putting a value on human life Consider how to balance risk reward of how much it is worth spending to saving one life What is the quality of life they would have if you did save them Q The frequency states that there is a 25 chance of 1 accident a 50 chance of 2 accidents and a 25 chance of 3 accidents The severity states that it costs 10 000 per accident What is the expected loss A 25 x 10 000 50 x 10 000 25 x 10 000 20 000 Q On the risk profile table what is the color green considered What is the color red considered A Green Good Red Bad RMI 2302 Exam 1 3 Degree of Risk Q How do you figure out what is riskier A Consider relative variation of actual from expected loss aka variation aka standard deviation How far is it from what we expected to happen from what actually happened Categories of Risk 1 Pure Risk will there be a loss or no loss There are clear expectations These risks only involve two possible outcomes 2 Speculative Risk will there be a loss no loss or a gain 3 Static Risk is the risk changing through time These risks do not change through 4 Dynamic Risk the chances of something happening now and happening later are different They change through time 5 Fundamental Risk risks that effect everyone a large portion of the population at the 6 Particular Risk risks that effect individuals a small group of people at a given time time same time 7 Core Risk organizational level risk these are directly associated with what an 8 Secondary Risk organizational level risk these have nothing to do with what an organization or business does organization or business does Q What are the eight categories of risk A Pure speculative static dynamic fundamental particular core and secondary risk Sources of Risk stuff 1 Personal Risks related to life health and safety on the individual level 2 Property Risks related to the potential damage to physical property material things 3 Liability Risks having to take responsibility for your actions inactions 4 Financial Risks savings and investments Q What are the four sources of risk A Personal property liability and financial risk Exposure a person or property facing risk of loss Peril the immediate cause of loss Hazard condition of affecting the frequency or severity of loss They affect perils Types of Hazards 1 Physical Hazards property tangible conditions aka tangible hazards 2 Intangible Hazards attitudes or culture RMI 2302 Exam 1 4 a Moral Hazard behavioral changes effects the frequency severity of loss b Morale Hazard indifference effects the frequency severity of loss c Societal Hazard legal or cultural attitude effects the frequency severity of loss Note there is very little difference between moral and morale hazards Q What are the two types of hazards A Physical Tangible and Intangible Hazards Q What are the types of intangible hazards A Moral Morale and Societal Hazards Attitudes Toward Risk 1 Risk Neutral people who are indifferent
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