DEFINING RISK

Understanding risk begins with the?definition of risk.

Let us take a look.

Risk is known popularly as the probability of suffering loss. This has been reckoned as a life management idea. Both in business and personal life we try to avoid this loss.

Dictionaries agree with this definition.

The definition was extended soon. Risk the probability of suffering loss while pursuing a gain. No one embraces risk without promised gain. To take the risk or not depends on the amount of gain dangling in front. The ratio must compel one to go ahead.

?A professional definition emerged lately.

Risk is defined as the effect of uncertainty on objectives.

Risk is seen as a shadow of objectives. Risk is defined in the context of objectives. Without objectives there is no risk to talk about.

Also in the past people hurriedly and, without much reflection, related risk to loss. In the modern definition risk is related to uncertainty.

The modern definition is more brief, authentic and sophisticated.

Uncertainty in the case of asset management - both physical and financial assets -?translates into variation in performance. The term “objective”, heavily stressed in the definition, here means functionality of the asset. People would rather refer to functions of an asset instead of objectives. People swallow the risk of variation in order to enjoy benefits from assets. Risk mitigation here means the good old variation reduction.

Business houses take risks while seizing market opportunities. The objective here is growth. Risk is market uncertainty, which goes in many names, for example volatility and intangibility. Lack of knowledge and foresight breeds risks.

To maximize human performance is a common goal in most institutions, social as well as business. Uncertainty in human behavior is a risk in such cases. Unpredictability and huge variation in character affect performance. In the extreme, they result in threats to safety and security, far more serious than missed objectives.

Limiting risks to objectives makes it the most practical definition. The consequence tree is cut short to the sphere of objectives. If the effects do not relate to one's objectives one is not interested.

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