Educational texts are awash with varying definitions of risk, which annoyingly imply that risk lacks practical relevance or is of only theoretical interest. This is a shame! Risk is often described in commercial terms, which means that companies pay some attention, but individuals lose focus. This is a greater shame!
Risk is defined as the probability of a company suffering financial loss from its direct and/or indirect business activities. For MMPI’s own business activities, risk has been specifically defined as the impact of uncertainty on our business objectives. But risk also affects consumers, so all commercial definitions should be reconfigured to personal circumstances.
The term ‘risk’ is often confused with ‘hazard’ or ‘exposure’. A toxic chemical; adverse weather conditions; a long car journey or a financial market variable may present a hazard (exposure), in other words they may present the potential for harm and/or financial loss. Risk, however, is the probability that this hazard will lead to a negative outcome, which is also referred to as a quantified risk.
The hazard (exposure) can be seen as the uncertainty in the future realisation of business objectives, such as earnings; budgeted expenditure; following procedures, etc. – or personal upheavals like redundancy, long-term illness, death of a partner, etc.
On the other hand, risk is a measure of the probability of a negative outcome of such a variable. Risk is a measurement beyond recognised exposures (hazards). A company may have contingency measures in place to dilute or deflate negative outcomes. An individual may rely on life and health insurance to defray the financial costs.
It is evident that we can all do very little about the existence of hazards, but we most definitely should be in a position to aggressively recognise, monitor and manage the resultant risks?
Risks may evolve and materialise over a period of short-, medium- and long-term timeframes; also, they may lie latent for a considerable time causing their potential effects to be underestimated through complacency (and/or laziness). In many ways, it is this nonchalance that is our downfall. Far too often, risks are seen as something that will never happen. Other people die prematurely – not us. Others suffer a crippling warehouse fire – not us. Others incur enormous medical bills – not us.
Conversely, there is no need to be paranoid about risk management or risk taking. We all take some risks and emerge unscathed. For example, there are a significant number of inherent risks in walking across the road. One of the highest inherent risks might be the potential of getting hit by a car. In order to off-set this risk, pedestrians carry out the sensible control of looking left and right to check for oncoming traffic before crossing. But this control alone is not sufficient – there is a residual risk in the modern world that pedestrians could be hit by a drone from above. The kindergarten Green Cross Code will have to be re-written.
This piece is not intended to be alarmist. It’s more of a sober reflection!