RMI2302 Exam 1 Study Guide Module 1 Individual Risk the uncertainty regarding loss for a single person o Playing sports driving a car investing money Organization Risk uncertain future event which could adversely affect the achievement of an organization s objectives o This can be applied to activities such as a new product launch employee incentive programs hiring and firing decisions Society Risk an uncertain future event which could adversely affect large portions of the population o Economic risk health risk Uncertainty Regarding Loss we don t know what is going to happen in the future and at least one of the outcomes is going to be unwanted Risk o Risk is not equal to danger o Jumping off a 1 story building has a lot less uncertainty because you could either walk away or die o Jumping off a 25 story building has a higher risk of death but less o What is a high risk driver more likely to have a loss o Probably more of a risk to jump off a 1 story building because there is uncertainty more uncertainty Statistical Frequency probability Likelihood Severity count Impact financial measures Risk Management Risk frequency how often something will happen High Medium Low An event is expected to occur in most circumstances An event will probably occur in many circumstances An event may occur at some time Likelihood Risk Impact the potential effect that a loss could have if it arises High Medium Low Serious impact on operation reputation or funding status Significant impact on operations reputation or funding status Less significant impact on operations reputation or funding status Expected Value Loss frequency x severity nothing about risk Risk Profile gives us an idea of how to manage risk High Medium Low loss Low Medium High Variation or Standard Deviation relative variation of actual from expected o How far is it from what we expected to happen to what actually happened Uncertainty doubt about our ability to predict future outcomes o Can differ across individuals even when risk is the same subjective with amount of info available views can vary o Information does not alter risk objective but can alter uncertainty o Reduction in uncertainty can be a good thing o Example Hurricane Katrina did not change the probability that hurricanes would hit New Orleans Didn t change the objective but did change the subjective Categories of Risk o Pure two potential outcomes there is or isn t a loss ex You go outside and your car is or isn t there Insurance comes into play vs Speculative possibility of loss or no loss ex Investing in stock Can very easily be diversified o Static not changing through time vs Dynamic changing through time o Fundamental affects a lot of people ex flood vs Particular only affects a small number of people ex Heart attack o Core core function vs Secondary can avoid of change Most risks are dynamic o Example texting and driving Sources of Risk o Personal Risks things that affect you individually health life divorce o Property Risks risk of loss to stuff you own car house clothes trademarks insurance comes into play o Liability Risks being held responsible for what you did or didn t do o Financial Risks monetary almost all risks have financial risk Exposure person or property facing risk of loss Peril the immediate cause of loss fire theft Hazard condition affecting the frequency or severity of loss if you store gas next to a furnace Types of Hazards o Hazards conditions affecting perils frequency of severity of loss o Physical Hazards property condition tangible Attitude Toward Risk o Intangible Hazards attitudes or culture Moral Hazard behavioral changes in face of risk under certain conditions do you drive different because of airbags Morale Hazards indifference Societal Hazards legal or cultural smoking abortion voting o Risk Neutral indifferent toward risk value of risky situation is expected loss organizations o Risk Adverse prefer to avoid risk willing to pay more than expected loss to avoid risk individuals ex Insurance o Risk Seeker prefer risk would pay more than expected return to engage in risky situation willing to take on risk so there must be some other reward gambling Burden of Risk on Society o Need for larger emergency funds Disaster relief setting this money aside opportunity cost for not using money for other things such as feeing the poor Loss of needed goods and services go hand in hand with disaster relief Fear and worry kids mortgages job risk creates this How do we handle risk o Individuals not so clear cut you make decisions everyday o Organizations entire industry risk management o Society most of the time politics get involved Risk Management scientific approach to dealing with risk Rules of Risk Management o Don t risk more than you can afford to lose o Don t risk a lot for a little o Consider the odds The Risk Management Process Identification of risks 1 Determination of objectives 2 3 Evaluation of risks 4 Consideration of alternative select of the tool 5 6 Evaluation and review Implementing the decision Evaluation and Review step 6 o In theory the evaluation and review are the final step but in the risk management process o Except in the rare care where an organization in newly created every organization will have a risk management program already in existence What have they done in the past what is working o Usually start with this o Reevaluate program s objectives o Repeat identification process to assure that it was performed correctly o Evaluate the risks that have been identified o Verify that the decision on how to address each risk was proper o Verify that the decision was properly executed Determination of Objectives step 1 o Most are trying to make money Post Loss Objectives Survival Mode Continuity of Operations Earning Stability Continued Growth Social Responsibility Identification of Risk step 2 Pre Loss Objectives Economy Reduction in Anxiety Meeting Externally Imposed Obligations Social Responsibility o There are a variety of tools available to assist in risk identification including questionnaires checklists and procedure guides o The preferred approach to risk identification is a combination approach in which all of the tools available are brought to bear on the problem o How are we going to fulfill our objectives o Want to be as thorough as possible Inspections o Just as one picture is worth a thousand words one inspection tour may be worth a thousand checklists o An examination of the various operation sites of the firm
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