RMI 2302 TEST 2 Module 6 10a Module 6 Risk Reward Employers want employees who can make critical decisions Individuals measured using expected utility o Insurance people willing to pay to avoid risk Organizations use expected value not expected utility o No natural risk aversion o Most organizations project future cash flows from investments opportunities Government society measuring reward to society is difficult o Many times the government is the only entity able to take on risk regardless of reward Bias subjective view probability different from objective Many sources Alter the decision making Donald Rumsfeld quote about known knowns known unknowns etc Problematic when it ends up being significantly different from the model Types of bias o Age biases o Cultural biases o Experience biases o Gender biases o Media biases Incentives things that motivate individuals to performs an action Incentives can be at the individual organizational or societal level Types of incentives o Financial most incentives o Moral do the right thing o Natural curiosity fear anger pain joy pursuit of happiness o Coercive negative reinforcement o Personal vs social The study of economics is basically a study of incentive systems Risk at the individual level Module 7 Loss exposures any condition or situation that presents a possibility of loss regardless of whether that loss actually occurs o Three elements asset exposed to loss cause of loss financial consequences of the loss Property o Asset exposed to loss Real property ex land buildings etc Personal property your stuff ex furniture jewelry art etc Liability types property owners automobiles employer employee parents and children animals o Cause of loss ex fire theft accidents etc o Financial consequences Reduction in property value Lost income Increased expenses o Asset exposed to loss Money other financial assets General special punitive damages o Cause of Loss Claim lawsuit Civil law vs criminal law Negligence o Financial consequences Defense costs Monetary damages Life premature death o Asset exposed to loss Your life o Cause of loss Premature death illness accident stupidity o Financial consequences Spouse dependents children Life long life o Asset exposed to loss Your savings retirement wealth o Cause of loss Outliving assets expenses income for too long o Financial consequences What happens when you retire Income Expenses Health disability o Asset exposed to loss Your health livelihood o Cause of loss Poor care poor genes bad luck illness etc o Financial consequences Ability to earn income could decrease or cease Living expenses may continue or increase Financial o Asset exposed to loss Your wealth Health disability unemployment poor planning etc o Cause of loss o Financial consequences Inadequate savings Back to work Cant retire Individual Risk Management process 1 Determine objectives 2 Identify risks 3 Evaluate risks 4 Choose your alternatives 5 6 Review evaluate Implement Highest risk during your 40s Evaluate risk using frequency severity o Severity varies based on wealth and income Smart pills What are smart pills manage ADHD memorizing Risk o Stimulant drugs such as Ritalin and Adderall that have been developed to help o Classified as schedule II drugs by DEA illegal without prescription o Helps many people focus and improves performance on learning tasks such as o Insomnia weight loss decreased appetite jitteriness increased risk of cardiovascular problems o Potentially addictive 10 in 2006 study o Decreased performance over time paranoia aggression irritability Reward Use one time o Improved performance on learning tasks memory you can remember more at o Only need to be on drug while studying not taking exam o Prescription use doubled from 2007 2011 25 35 or college student have used it o Only 3 4 are actually ADHD o Users are also more likely to smoke marijuana skip class lower GPAs They are dangerous article o Article by Alan Schwartz o Based on Richard fee well rounded student that committed suicide after becoming addicted They aren t dangerous article o By Joshua Gowin no different than other stimulants such as caffeine Module 8 Risk for corporations Types of organizational risk o Business risk Risk caused by operational hazard financial or strategic risks Can be caused by many things prices regulation competition etc o Operational risk Risk of change in value based on actual losses Losses from internal sources manufacturing fraud employee mistakes o Hazard risk Typically used in insurance industry to describe potential losses ex fire auto accident tornado etc o Financial risk Potential risk due to financial causes Losses due to exchange rate investment losses credit risks etc o Strategic risk Potential losses from poor business decisions Losses due to supplier choice financing options etc BP oil spill PR perspective green oil company o Explosion at Texas city Refinery March 23 2005 many lawsuits death and injuries o March 2006 leak discovered in Prudhoe Bay Alaska due to corroded pipe 267K gallons spilled BP response shut down oil fields 8 drop in US oil production o BP CEO Browne steps down in July 2007 4 days before Baker report released Report is critical of BP s approach to process safety BP should have paid more attention to previous incidents Instances of lack of operating discipline toleration of serious deviations from safe operating practices and complacency Gave BP 10 recommendations to improve company o Know that process safety is emphasized Big Data Organizations can use data by data mining buying trends targeted marketing o Mitigate risky business practices employee fraud operational risk black swans Use past data to predict future risks Q What are the different types of risk organizations need to think about from operational risk to the so called black swans A Operational risk the people processes and systems in place to produce the company s product service This includes internal fraud external fraud products business practices damage to physical assets business disruption system failures process management employment practices workplace safety Q What is a black swan risk A 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 Q How has risk changed in recent years A Globalization cascading network effect and Operational Risk 30 of business losses are
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