RMI Exam 1 Review What is risk Individual o Uncertainty regarding loss Organization organization s objectives Society o It is an uncertain future event which could adversely affect the achievement of an o An uncertain future event that could effect large portions of the population Risk Measurement Terminology Frequency Likelihood the probability that a loss will occur how often something will happen Severity Impact how bad is it when it does happen Expected Value Loss Risk Profile Categories of Risk Pure vs Speculative o Pure involve only 2 potential outcomes loss or no loss Ex Car was stolen or was not No possible gain o Speculative may have a loss or no loss but also have a gain Ex Buying a share of stock it can go up or down or remain the same Static vs Dynamic o Static risks unchanging through time Ex Chance of an earthquake or getting hit by a meteor Don t change daily o Dynamic risks that are changing through time Ex The risk of identity theft or credit card numbers being stolen through online transactions Fundamental vs Particular o Fundamental risks that affect large portion of population at a given time Ex Hurricane or health epidemic o Particular risks that only affect a single person or small group of people at a given time Core vs Secondary o Core risks that are inherent to the fundamental activities of an organization Ex UPS and risk of traffic accidents o Secondary risks that are not part of the core operations of an organization Ex Speculative derivative trading by UPS Sources of Risk Personal Risk risks that are directly related to an individual s life health or safety Property risks that are directly related to the potential for damage to physical property buildings jewelry etc Liability risks directly related to an individual being held liable for its actions or inactions inflicting physical harm on another individual or damaging someone else s property Financial directly related to the financial standing of an individual or organization For example investment risks new product launches etc Additional Terms Exposure person organization or property facing risk of loss Peril the immediate cause of the loss Hazard condition affecting the frequency or severity of the loss o Physical tangible hazard ex Wet floor causes slips and falls o Moral Morale attitude behavior that affects the frequency severity of loss Ex Not being careful will phone because you have insurance o Societal legal cultural attitude that affects the frequency severity of loss Ex How easy hard it is to sue someone who has caused you a loss Attitudes toward risk Risk neutral indifferent value of any risky situation is expected outcome Risk adverse prefer to avoid risk willing to pay to remove risk Risk seeker prefer risk to no risk willing to gamble or take on risk at values below expected value Burden of risk Need for larger emergency funds Loss of needed goods and services individuals and organizations often need to keep funds in reserve to pay for potential losses when losses occur funds from other sources may be allocated to those losses Therefore needed goods and services may be lost due to lack of funds Fear and worry economic losses occur when fear and worry of potential risk begins to weigh too heavily Risk Management Process 1 2 3 4 5 6 Determination of objectives Identification of risks Evaluation of risks Consideration of alternatives selection of the tool Implementing the decision Evaluation and review Scientific View of Risk Different view of risk More public policy view o Probability of a person suffering an adverse effect from some activity or exposure over a given period of time involvement Time element in measuring risk o Ignores of days lost Risk reduction o Both monetary and non monetary costs Requires putting a value on human life Innovation risk Risk return and trade off The riskiness of an innovation depends on the choices people make o Innovations to make us feel safer often lead to us changing our habits because we feel safer This may lead to additional risk 1 1 Recognize that you need a model mental model may be oversimplification 5 rules of thumb to minimize risk mathematical modeling 2 Acknowledge your model s limitations incorrect vs incomplete 3 Expect the unexpected factors will be over looked 4 Understand use and user who s using it and what they re using it for 5 Check the infrastructure Changes in infrastructure usually lag changes in products and services and that imbalance can be a major source of risk Incorrect vs Incomplete models o Incorrect a model whose internal logic or underlying assumptions are o Incomplete characteristic shared by all models basic model doesn t need to be themselves manifestly wrong Always STOP using it unlearned but added to Refine not reject Decision Making People organizations government Organizational decision making Decision Theory Used to determine optimal strategies where a decision maker is faced with several alternatives and an uncertain or risky pattern of future events o Steps of Decision Making process Identification of various possible outcomes no control over the outcomes Identification of all the courses of action control over actions Determination of the pay off function combinations of the acts and Choosing from among various alternatives on the basis of some criterion outcomes o One stage process Identify courses of action in the face of possible events Develop pay off and regret tables Choose a course of action in accordance with some principle o Pay off table represents the matrix of conditional values associated with all the possible combinations of the acts and events o Opportunity loss or regret the amount of profit foregone by not adopting the optimal course of action or that which would give the highest pay off for each possible event Pay off and regret tables Decision Rules under Uncertainty o Laplace principle based on philosophy that if we are uncertain about the various events then we may treat them as equally probable Expected mean value of pay off for each strategy is determined and strategy with highest mean is adopted o Maximin or minimax principle adopted by pessimistic decision makers who are Consider minimum pay offs resulting from adoption of various conservative in approach Dealing with profit maximin strategies Chose max profit Dealing with cost minimax Consider max cost associated with each alternative Chose alternative that minimizes this max cost o Maximax or minimin principle Maximax optimists
View Full Document
Unlocking...