Module 6 Risk within Individuals RMI Exam II o Expected Utility Must be reward in order to take risk Ex Take 5 or take a 50 50 chance of receiving 1 or 9 when you invest that 5 Risk doesn t outweigh the reward Risk with Organizations o Expected Value How much return outweighs risk bases whether a company takes the risk o No natural risk aversion o Use opportunity cost or cost of capital o CAPM Capital Asset Pricing Model Only reward systematic risk Not diversifiable risk o Efficient frontier the optimal combination of risk and return Risk with Government o Normally are willing to take risks Due to how large sale they are and their ability to recover from a risk Bias Incentives o Subjective view probability o Alternates individuals and organizations decisions o Examples of bias Age experience wisdom Culture suffering in society Experience natural disaster winning lottery Gender men and women make different decisions Media creates opinions for people o Things that motivate individuals to perform actions o Alternates individuals organizations and governments o Examples of incentives Financial Moral doing the right thing Natural curiosity fear anger pursuit of happiness Coercive negative reinforcement o Economics study of incentive systems o The law of unintended consequences unknown outcomes Politics o Have a high discount rate o Prefer short term over long term sacrificing the future for the short term Module 7 Module 7 Discussion Question Smart Pills Smart Pills Ritalin and Adderall o Developed to help manage ADHD o Schedule II drug under the DEA Same rank as Cocaine o Illegal to take without prescriptions Federal offense o Proven to help remembering Risks that come with Smart Pills o Short term Insomnia weight loss jitteriness o Potentially addictive 10 of all recipients of the drug o Long term Decreases actual learning performance Due to insomnia addiction malnutrition o Better to do while studying not during exam Who Uses Smart Pills o Prescribed uses has doubled over 2007 2011 o 25 35 of college students have used smart pills o 3 4 of population have ADHD More younger generation Most of the time will grow out of ADHD o Users are more likely to Smoke weed Skip class Lower GPA Alan Schwarz o Case on Richard fee Academic scholarship college class president etc Became addicted to Adderall Committed suicide two years after college o Points out problems in health care Quick diagnosis Ability to manipulate symptoms Quick to medicate Doctor shopping Joshua Gowin o Smart Pills are no different than stimulants Caffeine They do work Categories of risk at Individual Level o Some risks may appear in multiple categories 1 Property 2 Liability 3 Life Health 4 Financial Loss Exposures o Condition or situation that presents a possibility of loss 1 Loss does not have to actually occur o Three elements to Loss Exposures 1 Asset Exposed to loss Money financial assets o Real property Land Buildings Crops o Personal Property your stuff Jewelry art autos General Cost due to loss Special Wage reduction due to loss Punitive damages Punishment due to loss o Jail time probation ect 2 Cause of Loss Fire Theft accidents Claim lawsuits Tort contract statutory 3 Financial consequences of loss Increased Expenses Reduction in property value Lost income 4 Specific types of Liability Property owners Automobiles Employer employee Parents and children Animals Premature Death dying when you still have financial responsibilities o Asset exposed to loss 1 Your life death o Cause of loss o Financial cost of loss 1 Wage earning adult 1 Premature death illness accident stupidity depends Biggest impact single with dependents 2 Non wage earning adult o Long Life 1 Asset exposed to loss Your savings retirement wealth 2 Cause of loss More impacting than an individual with non wage earnings and no Outliving assets expenses income for too long 3 Financial Consequences What happens when retired Expenses Income o Health Disability 1 Asset exposed to loss Your health livelihood 2 Cause of Loss Poor care poor genes bad luck injury etc 3 Financial Consequences Ability to earn income may decrease or cease death Living expenses may continue or increase Evaluate same exposures as premature death Health disability unemployment poor planning etc o May only happen once but severity has different measurements o Financial 1 Asset exposed to loss Your wealth 2 Cause of Loss 3 Financial Consequences Inadequate savings Back to work Can t retire How to Evaluate death 1 Wealth Income 2 Risk Management Process o Determine objectives o Identify risks o Evaluate risks o Choose your alternatives o Implement o Review Evaluate Prices Regulation Competition Also defined as risk caused by operational hazard financial or o The people the processes and systems in place to produce the company s Module 8 Business Risk o Deviations in profitability Can be caused by Operational Risk strategic risks product service o Potential losses from internal sources Can be caused by Hazard Risk o Very personnel safety focus Manufacturing process fraud mismanagement employee mistakes Typically insurable risk Pure risks that organizations are exposed to generally physical causes fire flood etc Very fiscal risks Financial risk Strategic Risks o Potential variation due to financial causes o Losses due to exchange rate investment losses credit risks liquidity risks o Potential losses from poor business decisions bad strategy o Can be supplier s fault o Financing options How data analytics can help o Data analytics Tools to predict areas of vulnerability in organizations Deals with Black Swan Risks and other risks Looks for markers of situations where human behavior can impact operational risk Looks for factors that influence human behavior o Ex laziness fatigue moral ethical opportunities stressors debt job concerns family issues o Big Data We create so much data how can it be organized Data mining Buying trends Targeted marketing Mitigate risky business practices employee fraud operational risk and Black Swans o Black Swan risk High impact hard to predict rare event Module 8 Discussion Question Putting Profits Before Safety Extreme outlier e g Bernie Madoff mortgage crisis Overriding Themes of Case o Corporate Strategy o Public Relations o Corporate Culture o Workplace Safety o Process Management March 25 2005 o Explosion at Texas City refinery 15 dead 170 Injured 1700 lawsuits against BP o BP fined 21 3 million dollars by OSHA 300 willful violations of OSHA rules
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