Risk Management. What Is Risk ? Essay, Research Paper

WHAT IS RISK ?Table Of ContentsIntroduction Risk & probability Identifying Risk Procedure Of Modelling Risk Methods Subjective Assessment Of Risk Conclusion References INTRODUCTION ‘Risk : (i) the possibility of meeting danger or suffering the harm or loss ‘ (Oxford reference dictionary). This is the general definition of risk. The faulty perception of meeting danger or suffering harm or loss would lead to misjudged actions to be taken . When these actions are taken for large scale projects ,for instance concerning the future of a big company or public protection , it could have devastating effects . For a number of dangers there are a lot of statistical data ,such as car accidents ,but for other it is difficult to have an actual number . For example it is impossible to have an exact figure of the number of people died from smoking cigarettes . So the help of hard facts ,statistics and probabilities, is useful up to a point in taking decisions concerning risks , and subjective judgement is required . In this essay we will try to identify the relationship of risks with probabilities , the association of risks with particular events , modelling and methods used to asses risks in a system and finally the subjective perception of risk by individualsRISK & PROBABILITYProbability is in mathematical terms the mathematically expressed chance of an event taking place , normally as a fraction of (1) . Usually probabilities are conditional and have time limitations . For example the probability of a car accident happening varies between differently populated areas and different times of the day . When the same road is busier during rush-hour there is a higher probability of an accident happening . It is known from statistics that probabilities are usually approximated by frequencies , so the frequency of an event happening in the past is our guide to the prediction of the same event happening in the future . But it is not 100% certain that it will repeat it self as before .For example in an experiment tossing a coin one hundred times might give fifty times to tails and fifty times heads , giving us (.5) probability happening each way . But even if we have this information we cannot be certain that the next one hundred tosses of the coin will produce the same result .In the same sense the sun has a slight probability not to appear in the sky again although it had been doing so for several billions years . Therefore probability estimates are quite subjective .IDENTIFYING HAZARDSMost of the time we relate risks with the probability of a hazard taking place . ‘Hazard’ is an inherit capacity to cause damage – an intrinsic property .For example ‘Arsenic’ (a chemical substance) is hazardous ,which is a property and so is not probabilistic ,therefore not risky- risk is applied to events not properties . Hazards need to be quantified , observe their probability and therefore partially predicted. Hazards and therefore risk s can be under three categories , economic , safety and environmental . The economic hazards have been studied for many years by the profession most interested in them , the insurance industry . As a result they have been quantified at their greater part . In the same way safety risks have been studied especially through research on the price people are willing to pay for avoiding the risk of injury or death . Quantification of environmental risk is contend ‘any decision implies valuation and that if environmental valuation is not tried in the taking of an environmentally relevant decision , we do not know whether the decision was a sound one or not in terms of economic efficiency’(Barbe & Pearce,1991) PROCEDURE OF MODELLING RISKTo be able to asses a certain risk we need to identify the hazards involved , to assign probabilities to these hazards and finally to model the whole situation . So that we accumulate a total risk. After assessing that risk we can take the appropriate action to avoid any misjudgements which could lead to hazards . An example of this procedure is following . example : If we take under consideration the example of building a dam . (1) We have to identify and list of all possible hazards that could occur and considered serious . This could mean the systematic examination of all the components , structures and functions that are part of it . (2) Break down the sequence of events that might lead to these hazards . For instance ,the alarm signalling high tide might not go off when it has to and lead to an overflow . This could be due to a breakdown of the water level meter caused by a faulty screw . (3) Assign probabilities of malfunction to these different parts of the system ,that might lead to hazards , where statistical data exist . For example the failure rate of a certain screw could be found in records of its performance in other systems. (4) starting from the bottom of the system towards the end , we can derive a total risk probability by multiplying the probability risk of each component leading to hazard . At this point we can bring up some methods used to model and analyse the risks and failures in a system.METHODSIn the last three decades in particular ,there where many methods developed especially where the analysis of risk is used for decision analysis .This was in a big part of it due to the increase of available computer power and the constant development of computational procedures . Some of these methods as taken from (C.B.CHAPMAN ,Risk Analysis , a view from 1990) , are presented below . ….first is the O.R.method in table 1steps of the O.R. method : 1 Problem description . 4 Model and solution testing . 2 Model formulation . 5 Solution implementation . 3 Model solution . table 1….then is the CPM/PERT method which is similar to the O.R. method but is offering a series of steps which the decision maker can use to implement their models efficiently and effectively , particular to the problems they are considering and the models they are using , table 2steps of the CPM/PERT method : 1 List of activities . 2 Estimate activity duration . 3 Asses precedence relationships . 4 Diagram activity . 5 Compute project duration and floats . table 2 6 Adjust for timetable restrictions . 7 Adjust for resource restrictions . 8 Implement plan . 9 Control and update …..another technique for analysing risk is the one developed for B.P. international in the late 1970s and is shown in table 3. steps of the SCERT method :phase step Scope identification of activities identification of primary risks identification of primary responses identification of secondary risks identification of secondary responses Structure identification of minor and major risks identification of specific and general responses identification of simple and complex decision rules risk response diagramming table 3 Parameter identification of desired parameters scenario identification and probabilities estimate Manipulation risk computation & Interpretation decision rule assessment for risk efficiency decision rule assessment for risk balance assessment of budget contingencyAs we have seen statistical data and probabilities deriving from them are combined in the methods above with practical procedures , such as identification of hazards . As a result the user would be able to develop appropriate and more understandable models of the risks involved in a system . So models incorporating only mathematical models are not valid .SUBJECTIVE ASSESSMENT OF RISKAfter appropriate models have been constructed , is the turn of the person to make the decision of taking or not a risk . This person would have his/her own ’subjective’ perception of risk . This particular person has particular ideas and concepts of risk which could be similar or to the people surrounding this person . This could be a result of the sharing of opinions , assumptions , beliefs between them . Also the confidence that this person has in institutions more than people outside his/her environment could lead him/her take decisions different than the other people outside this environment would do . As a conclusion the perception of risk is multidimensional . Research has found that other factors except probabilistic risk levels can influence peoples(laypeople or scientists) perception of risk as intolerable .A way that may help us understand why people don’t take only under consideration the absolute probabilistic value of risks can be found through psychology . A recent research has shown that people find more difficult to tolerate risks which are vivid in their memory and are connected with disasters ,such as earthquakes and fires . This is a result of some psychological tasks , existing to simplify complex mental rules which appreciate risks . And they are called Heuristics . The Heuristic rules relevant to the appreciation of risks are the ‘availability’ and the ‘overconfidence’ rules . The availability heuristic is when people are quick in recalling events which are frequently occurring and enforce the intolerance of risk ,deriving from these events . These events can be real or can be an image taken from Cinema or T.V. For enable homicides can be recalled easy as they are seen all the time on T.V. but in real life are very rare . The overconfidence heuristic , as the title explains people can wrongly perceive risk when they are very confident in taking decisions based upon their own experience . For instance an electrician could underestimate the danger of electricity as he/she is always working with it . Based on the same research some other reasons where found to make people intolerant of risks , and they where : …………When risks are not managed by the person taking the risk. …………When they are taken compulsory by the person involved . …………When they were seen as unfair in the risk distribution. …………When the benefits from these risks are not clear. …………When they might cause hazard in ways not able to be observed. …………When they might cause harm to future generations. …………When they are not familiar to the bearer of the risk . Therefore the perception of a risk is determined by a number of factors which sometimes has nothing to do with the absolute probabilistic chance of it happening , but depend on subjective feelings and estimations .CONCLUSIONAs we did observe ,there is a number of methods helping us to create appropriate models for the assessment of risk , using probabilistic values assigned to each hazard , and incorporating mathematical and practical methods in these models . But when the decision has to be taken ,there is a number of factors influencing the decision maker ,away from absolute probabilities , affected by personal experiences , attitudes and beliefs . These factors vary between people . This fact makes it difficult to asses a risk in an ‘objective’ way . At that point the danger, of not taking a positive decision for the whole , arises . Probably the only way of taking a positive decision for the whole(company, environment, public safety) will be to consider all relevant information to the hazard involved and asses it in the most ‘objective’ way possible ,taking also under consideration the needs of the people involved . Probably the only way to achieve this is by starting to use methods including all possibly identified risks that could be calculated arithmetically , then harmonising these methods ,to be accepted by the whole of those involved in taking the risks. And finally take a decision based on these calculations and common ideas beliefs attitudes of those involved in the risk to be taken .This would result in a common tolerance of the risk and future acceptance if a danger occurs .In few words all information available about a risk is necessary to be obtained before taking this risk. References..Oxford references dictionary . ..Risk Analysis A View From 1990 . (C.B.Chapman) ..Business Decision And Managerial Risk/A Note On The decision Analysis Approach (J.Arret) ..Facts And Fears :Understanding Perceived Risk . (Paul Slovic , Baruch Fischoff , Sarah Lichtenstein) ..Valuing the environment : six case studies . London (Barde.JP.&Pearce . DW .(1991) ..Perceived Risk , Trust & Democracy’ Risk Analysis 13 (Slovic P. (1993) ..Risk Perception (Royal Society ,(1992), Pidgeon N., Hood C., Jones D., Turner B., Gibson R.) ..Risk :Analysis Perception & Management (Royal Society ,(1992),London U.K.:The Royal Society) ..’Risk Management’Integrated & Enviromental Management 27(March) (Calow P.(1994) ..Risk Management Quarterly / Newsletter January 1993