Module 1 What is Risk Individual Organization Society uncertainty regarding loss the unknown Using the term risk Which is riskier o some unknown and some aspect of loss associated with o Jumping off a 1 story building o Jumping off a 25 story building What is a high risk driver Jumping off a 1 story building is riskier because there is more uncertainty unlike the 25 story building because you know the outcome Terms Danger does not equal risk Frequency likelihood how often something occurs Severity impact Expected vaule loss frequency times severity Risk profile Degree of risk Relative variation of actual form expected loss How far is it form what we expected to happen to what o Variation or standard deviation actually happened Start thinking about risk Uncertainty is doubt about our ability to predict future Uncertainty can differ across individuals even when risk is the outcomes same subjective Information does not alter risk objective but can alter uncertainty Categories of risk Reduction in uncertainty can be a good thing Pure vs speculative chance of gain Static vs dynamic o Pure there is no upside there is loss or no loss no o Speculative can loss or gain o Static risks that are unchanging through time o Dynamic o Fundamental effects everyone o Particular effects individuals o Core Fundamental vs particular Core vs secondary o Secondary Sources of risk Personal risk Property risk Liability risk Financial risks loss Exposure person or property facing risk of loss asset exposed to Peril immediate cause of loss Hazard condition affecting the frequency or severity of loss Types of hazards Hazards conditions affecting perils frequency or severity of loss Physical hazards property conditions Intangible hazards attitudes or culture o Moral hazard behavioral changes o Morale hazard indifference o Societal hazard legal or cultural Ex have insurance on my phone so idc if I lose it Attitude towards risk Risk neutral indifferent towards risk Risk averse prefer to avoid risk o Value of risky situation is expected loss Risk seeker prefer risk o Willing to pay more than expected loss to avoid risk o Would pay more than expected return to engage in risky situations Burden of risk on society Need for larger emergency funds Loss of needed goods and services Fear and worry Definition of 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 Risk management process Determination of objectives o Post loss objectives Survival Continuity of operations Earnings stability Continued growth Social responsibility o Pre loss objectives Economy minimize costs of risks Reduction in anxiety Meeting externally imposed obligations Social responsibility Identification of risks o Questionnaires checklists and procedure guides o Inspections an examination of the various operation sites of the firm and discussions with managers and workers will often bring attention to risks that might otherwise have been undetected better than any of the above methods o Interviews Evaluation of risks o Loss frequency probability distributions o Loss severity o Use of statistics Maximum possible loss Probable maximum loss Central tendency Measures of variation Two reasons that potential severity must be Some notion of severity is necessary for measured o Importance of severity in ranking exposures classifying risks Classed as critical important or unimportant depends on the potential of loss Consideration of alternatives selection of the tool o Loss control reduce the level of risk increase o Loss financing retention and self insurance insurance precautions hedging Planned vs unplanned unplanned is the worse Funded vs unfunded Funded retention Reserves Self insurance Captive insurance companies Credit o Internal risk reduction diversification investments in o Risk control avoiding losses information Includes risk prevention and risk reduction Not ALWAYS trying to reduce risk Encompasses all techniques aimed at reducing the number of risks facing the organization or the amount of loss that can arise from these exposures o Risk prevention and reduction Preventing the loss form actually occurring Reducing the severity of those losses that do Some risk control efforts aim at reducing occur frequency prevention others seek to reduce the severity of the losses that do occur reduction Implementing the decision Evaluation and review o Reevaluate program s objectives performed correctly o Repeat identification process to assure that it was o Evaluate the risks that have been identified o Verify that the decision on how to address each risk was o Verify that the decision was properly executed proper Module 2 Scientific view of risk The time element in measuring risk Public policy view of risk than what we have discussed so far Average lifetime risk of highway death o 2 2 o varies with driving habits o this is out of women who live to be 95 or greater 1 in 8 women will develop breast cancer ignores some information using the number of days lost o says dying young is a bigger loss than dying old in this case smoking is a huge risk far more than flying fires homicide and driving combined 30 of all cancer deaths in US linked to smoking Risk reduction and public policy Risk reduction has costs both monetary and non monetary Requires putting a value on human life How do you balance risk reward o Can drive highway deaths to near zero reduce speed to o How much are we spending on TSA How many lives 5 MPH have been saved o Should the general public make the risk reward Who gets to decide Risk and return trade off decisions The riskiness of an innovation depends on choices people make The more informed their choices the lower the risk Innovations to make us feel safer often lead us changing our habits because we feel safer Five rules of thumb to minimize risk o This may lead to additional risk Recognize that you need a model o Decision about risk and return when you adopt a new o A mental model may be an oversimplification product technology is informed by a mental model Additional variable and their relationships between one another make the model more complicated o Models that people apply to real life situations often exist semiconsciously o Mathematical modeling Allows more precision than human cognition Humans can set mathematical models to execute on their behalf based on some specific guidelines The more factors you
View Full Document
Unlocking...