Friday, 10 April 2015

Risk vs Reward - Notes #3

Today’s post represent my study notes for Strategic Risk Management where the objective is to give a basic overview of the subject as opposed to developing a detailed knowledge and understanding at this time. With this in mind the topic that will be covered is  "TheConcept of Risk"


If you are from France then you would be pleased to know that the word ‘risk’ originated from the French word ‘risqué’ and it was only around 1650 that the word entered the English language. It was predominantly used in the formal legal sense in insurance documents around the 1730’s. This video depicts the concept of modern day risk on the open seas:

As you can see, this high-risk activity offers potentially high rewards as these pirates are prepared to take these risks because of that fact; the chance of making a lot of money very quickly vs. the risk of being killed or captured. It is interesting to note the concept of risk and reward in the video as the pirates are well aware that their potential gains from their actions would not be possible without the risk element.

Today the world is full of risks and these risks increase as a function of both human and organizational evolution and development. In an earlier post I mentioned that risks exist both inside and out of an organization, it is therefore important to examine the level of these threats. The larger and more complex an organization then these risks also tend to increase. This video highlights a new form of risk emerging in the Information Technology sector.

Cross-border business between organizations rely on the latest technology to become efficient and as such they will buy the latest computers and software, however this becomes a potential IT risk as these organizations become dependent on electronic data storage and communications. At loss to the business is sales, customers, and the strength of its brand in the market place.

Just like the pirates in Somalia so too are the Hackers who understand the risk vs reward concept. In this final video we listen to Chris Drake at a TED seminar.

As a person you too face varying degrees of risk in your everyday life. This is dependent on your personal attitude towards various sporting activities where some generate a higher level of risk than others. Lets have a look.

We naturally consider risk and reward as part of any decision-making process. We make decisions constantly whether major or minor, and directly or subconsciously. As a buyer we also make extreme ‘scientific’ and intuitive’ risk and reward considerations. 

In making any decision we have a human cognitive process for considering risk and reward, this is our process for ‘risk analyses. We evaluate potential risks and rewards in terms of the range of acceptable outcomes when deciding on whether or not to do something. Our mind considers this model in which scenarios i.e. possible events and outcomes are considered in terms of possible actions. The possible gains are then balanced against the possible losses, and a subjective decision or objective decision is made as to whether or not that outcome is acceptable. This conditions of risk is the basis of decision making by us which we perform many times everyday on a subjective basis and often at a subliminal level.

Risk is not a negative concept as the universe is characterized by constant change and the world in general by uncertainty. Because change is a dynamic mechanism and influences almost everything, entities that evolve most efficiently are those that can adapt most effectively to change.

Risk is necessary in order for opportunity to exist. It must be understood that to develop an opportunity, you have to accept the risks that inevitably accompany that opportunity. It is therefore important that you can identify those risks and then manage them so that they do not threaten you or the existing business. This is the reason why risk management systems must monitor those risks so that they can be controlled at acceptable levels while exploring the corresponding opportunities.

Have you ever noticed that a good poker player, if he has a particular winning hand, will raise the stakes so as to exploit the opportunity and intimidate the competitors? Each competitor has their own risk appetite (which should not be confused with risk attitude) at which point there is a limit that they dare not go. This concept is extensively used in business when one organization can raise the stakes to a level where it can exploit the weakness of its competition. This is one of the ways where risk is a positive attribute. 

Risk is not a static entity, its dynamic. It is not only about potential negative events butit is also about positive events. Risk management entails looking at the complex worldof business, analyzing all of its opportunities that are presented and then making an informed decision as to which one is the best. 

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