WHAT IS RISK


WHAT IS RISK
Risk is part of each and every human endeavor. From the moment we get fully up each morning, drive or take public transportation to access school or to work until we get back in our beds (and perhaps even afterwards), we are confronted with risks of different degrees. What makes the study of risk fascinating is that although some with this risk bearing may not be completely voluntary, we seek out some risks on our own (speeding on the highways or gambling, for instance) and enjoy them. While a few of these risks might appear trivial, others create a significant difference in how we live our lives. On a loftier note, it can be argued that every major advance in human civilization, from the caveman's invention of tools to gene therapy, has been made possible because someone was willing to take a risk and challenge the status quo.
Risk may be the potential of loss (an undesirable outcome, however not necessarily so) caused by certain action, activity and/or inaction. The notion implies that the choice having an influence on the outcome sometimes exists (or existed). Potential losses themselves may also be called "risks ".Any human endeavor carries some risk, but some are much riskier than others.
Risk could be defined in seven various ways
1. The possibility of something happening multiplied by the resulting cost or benefit if it does.
2. The probability or threat of quantifiable damage, injury, liability, loss, or some other negative occurrence that is brought on by external or internal vulnerabilities, and that could be avoided through preemptive action.
UNCERTAINTY
Uncertainty is at the core of the thought of risk itself. It is uncertainty about the outcome in certain situation. Uncertainty doesn't exist in the natural order of things though there are several outcomes, which are uncertain. For example: the weather for the test match; the likelihood to be made redundant; the risk of having an accident. There's surely uncertainty surrounding all of these events.
In 1921, Frank Knight summarized the difference between risk and uncertainty thus: "… Uncertainty should be
 aken in an expression radically distinct from the familiar notion of Risk, where it never been properly separated. … The primary simple truth is that "risk" means in some instances a quantity susceptible of measurement, while at other times it's something distinctly not with this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending which of the 2 is actually present and operating.
It can look that the measurable uncertainty, or "risk" proper, once we shall use the term, is so far distinctive from an un-measurable one that it's not in effect an uncertainty at all."
Risk is incorporated into many disciplines from insurance to engineering to portfolio theory that it should come as no surprise that it's defined in various ways by each one. It is worth considering some of the distinctions:
(a) Risk versus Probability: While some definitions of risk focus only on the possibility of an event occurring, more comprehensive definitions incorporate both possibility of the big event occurring and the effects of the event. Thus, the possibility of an extreme earthquake may be really small but the effects are very catastrophic that it will be categorized as a high-risk event.
(b) Risk versus Threat: In a few disciplines, a contrast is drawn between risk and a threat. A threat is a low probability event with large negative consequences, where analysts may struggle to gauge the probability. A chance, on another hand, is defined to be always a higher probability event, where there is enough information to create assessments of both probability and the consequences.
Lesson 1 Understanding and Managing Risk 
(c) All outcomes versus Negative outcomes: Some definitions of risk tend to target only on the downside scenarios, whereas others tend to be more expansive and consider all variability as risk. The
engineering definition of risk is defined as the merchandise of the possibility of an event occurring, that is
viewed as undesirable, and an analysis of the expected harm from the big event occurring.
Risk = Probability of an accident * Consequence in lost money/deaths
In contrast, risk in finance is defined with regards to variability of actual returns on an investment around
an expected return, even though those returns represent positive outcomes. Building on the last
distinction, we must look into broader definitions of risk that capture both positive and negative
outcomes

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