Basic Life Safety Principles - GN1204: Life Safety - Business Informatics. Risk is what is Risk: definition - Psychology. NES By financial implications
The variety of operating risks inherent in the activities of commercial organizations is great. And their number is constantly growing, since not only production technologies are becoming more complex, but in the context of the development of competition, management methods are undergoing changes, which also contributes to the complexity of the architecture of risk events. Academic and industrial scientists are finding new types of risks, and they need to be classified for identification and effective management purposes.
Basic approaches to dividing risks into classes
The concept and classification of risks occupies key places in the scientific and methodological knowledge of risk management, one of the youngest disciplines of modern management doctrine. Many species categories are universal and affect virtually all companies and organizations in the business environment. However, there are activities that are associated with specific types of risks. For example, the banking and insurance business areas have their own unique groups of risks that appear in other industries only sporadically.
The variety of identified threats is great: from terrorist attacks and man-made disasters to bankruptcies caused by external crisis phenomena, structural breakdown at the level of entire industries or an individual enterprise. The modern world is gradually but steadily being drawn into a zone of turbulence, so to speak. There are types of risks unprecedented in Russia, caused by:
- business transnationalization;
- the imposed sanctions regime;
- retaliatory measures by the government of the Russian Federation;
- local military conflicts at the borders of the country;
- interstate black PR-actions.
Paradoxically, such types of risks as losses as a result of computer failures, staff reductions, bankruptcy of an enterprise due to the refusal of a credit institution to restructure debts, against the background of the current events, no longer seem so tragic. Increasingly, the so-called "domino effect" is manifested, when the bankruptcy of a large organization is the basis for the emergence of a series of losses of enterprises associated with it by close economic ties.
A company faces risks at different stages of its life cycle. The main conditions for their occurrence are formed due to the uncertainty of the sources of the results of the current business situation. Such sources include:
- business activities of the enterprise;
- activities of the head of the organization;
- insufficient information support for decision-making (state of the external environment).
A typical example is an organization whose management makes a decision without having full information about the partners in the deal, their financial condition, and the legality of their activities. This often carries the risk of future losses. Another example is the lack of information about the latest changes in tax legislation, which are fraught with the threat of fines for the company. The essence and classification of risks make it possible to reveal their belonging to different species groups due to the main distinctive features, which are presented in tabular form below.
Division of types of risk according to the main classification criteria
Division of risks according to the degree of acceptability and dynamism
Classification of risks according to the degree of danger (acceptability) will allow us to focus on the concept of acceptable risk, which forms the main mechanisms for managing them. Let us recall the three main steps of the concept: identify hazard factors, assess them and reduce the threat through the developed measures. Based on these actions, the manager decides what level of risk he can afford in the current operating conditions. In this regard, the following types of risk are distinguished:
- permissible;
- critical;
- catastrophic.
Model of types of risks depending on the decision in the concept of acceptable risk
Above is a model of zoning areas in which management decisions are made. The diagram shows the dynamics of profitability and possible loss of profit, taking into account the amount of the admitted risk. Risk always accompanies effective management, but a certain turning point comes, crossing which, a business person becomes unable to overcome the level of danger that has arisen, and the damage turns out to be irreparable.
Under the acceptable risk we mean the threat of losing the financial result of operating activities or an ongoing project, which is potentially less than the expected profit. In this case, the economic feasibility of a particular event or activity as a whole remains. A more dangerous degree of risk is its critical option, in which the level of probable losses approaches the amount of material costs for the implementation of a transaction, project or production. We can say that this is the first degree of critical risk. Both designated categories may be justified under certain conditions in case of application.
The following two risk categories are hardly acceptable. A further increase in the likelihood of threats leads to the fact that the amount of possible losses reaches the level of the total costs of the enterprise. This state of affairs corresponds to the second degree of criticality. Finally, the risk is catastrophic when threats become comparable to the size of the company's assets and even exceed its value.
Dynamic and statistical risk groups are distinguished according to the dynamism criterion. We will devote the next two sections of the article to the dynamic group. The specificity of the statistical group is their inevitable presence in entrepreneurial activity. The main categories of risks related to this group:
- as a result of natural disasters;
- as a result of committing criminal acts;
- due to the deterioration of legislation;
- as a result of the loss of business leaders by the company due to death or other circumstances.
Dynamic risk group
The risk classifications generated for this group are based on the speculative nature of certain opportunities, the likelihood of which is present in the business. Dynamic risks carry the potential for both loss and profit for the company. Among this category, the following risks stand out:
- financial;
- political;
- technical;
- industrial;
- commercial;
- industry;
- investment.
We will start our review of the group with financial risks. This category is characterized by two interpretations of attributing the likelihood of threats to financial risks: broad and narrow. A broad outlook assumes the risk of losses in the course of any financial transactions. I am closer to a narrow position in which the financial risks are those arising from financial investments. This category is devoted to an article on the topic. We will remind you of their main subspecies:
- currency;
- credit;
- liquidity;
- market.
Institutions of power carry out their policies at the state level. They form a specific category of risks - political. One of the important criteria for the investment attractiveness of a country is its political and legislative stability. At all times, business asks the authorities for this, and this request is always ignored. It is impossible to avoid this a priori. Among the most significant political risks of recent times are the following.
- Threats caused by sanctions over the annexation of Crimea and the implementation of the Minsk agreements.
- The danger of terrorist attacks, military actions that could entail significant damage and business bankruptcy.
- The threat of termination of transactions due to decisions of the countries to which the partner company belongs.
- The risk of a foreign exchange transfer, according to which it will not be possible to transfer funds into the currency of the investor or lender for settlements.
Technological progress leads to the threat of man-made disasters, aging of equipment only exacerbates this trend. The category of technical risks refers to internal risks and is determined by the level of organization of production, the system of prevention and safety. This type includes the following varieties:
- accidents, breakdowns, equipment malfunctions;
- the emergence of side and negative effects from the introduction of new technologies;
- the inability to master innovations due to the low technological level of production;
- unsatisfactory R&D results.
Several articles will be devoted to the categories of industrial and commercial risk in the future. It should be noted that both of these species are closely related. Production risk is associated with the processes of ensuring and executing the production of products. Commercial risk arises in the process of promoting and marketing manufactured products and goods purchased for resale.
Categories of industry and investment risks
Sectoral risks are identified opportunities for losses due to changes arising both in the economic situation within the industry and in comparison with other sectoral areas of the country's economy. Industry risk is also considered in relation to enterprises that carry the features of a particular industry. Thus, the classification of the emergence of threats is different for industrial enterprises, banks, distribution companies. Below are two examples of classification schemes of risks, formed by factorial criteria for trade, intermediary and manufacturing companies.
Reseller Risk Classification Scheme
Classification scheme of risks of a manufacturing enterprise
The stage of the life cycle of an industry and intra-industry competition determine the main threats to enterprises belonging to it. At the same time, competition between enterprises with related areas of activity testifies to the stability of companies operating in one industry in comparison with enterprises in other industries. This information is divided into the following areas:
- the structure and cost of the “entrance ticket to the industry”;
- the level of price and non-price competition;
- availability of substitute goods or services on the market;
- solvency of buyers;
- market opportunities of suppliers;
- social and political environment.
The investment type of risk occupies a special position. On the one hand, it can be classified as a type of financial risk, since investment management is closely related to finance. On the other hand, investments take a stand-alone position. I propose to consider investment risk broader than the risk of only financial investments (investment portfolio). Any investment, including capital investment, carries a specific potential for threats and dangers. These include the following types.
- Capital.
- Selective.
- Percentage.
- Country.
- Operating.
- Temporal.
- Liquidity risk.
- Inflationary.
- Risk of legislative decisions.
One of the important types of investment risk is innovation risk. Since innovations are actively discussed at the level of public policy, and the type of activity itself is associated with the likelihood of failure and loss, we will pay special attention to this topic in a separate article. The classification of innovation risks is presented in a schematic form below.
Classification scheme for enterprise innovation risks
In this article, we have made an overview of the possible types of risk of commercial organizations. It is useful for a project manager to possess the classification signs of all possible threats, because each type requires a special approach to identification, assessment of factors, and risk management. Gradually, the project paradigm will become dominant in the economy. This is inevitable, just as at one time the functional approach began to dominate, the time of which is already coming to an end. But in order for project management to become an everyday routine of mass daily business, riskology must be fully integrated into it, the basic level of which is determined by the types of risks being operated.
English risk, fr. risque from it. risico - goes back to the Greek. rixikon - rock: origin. "To take risks" - to maneuver between the rocks) - 1) the likelihood of events with negative consequences; 2) the risk of unforeseen losses, losses, loss of income, profits in comparison with the planned option. There are three groups of risks: political (due to the influence on the economic. Processes of political. Changes, military conflicts, imposition of restrictions, embargo, nationalization of property, etc.); ecological (associated with the influence of anthropogenic changes in existing natural objects and factors); economic (caused by the influence of economic decisions or actions taken on economic processes). To R. economical. include: R. banking - the danger of not receiving profits arising from the specifics of operations carried out by credit institutions; R. lending - the likelihood of non-return received. the borrower of loans and non-payment of interest on the loan; R. currency - the danger of currency losses, communications. with a change in the exchange rate; R. insurance - danger k.-l. events, in case of the occurrence of which insurance is carried out; R. interest rate - associated with changes in interest rates; R. inflationary - caused by an increase in production costs due to inflation. process; R. price - due to changes in the price of debt due to an increase or decrease in the level of interest rates. At the production, the following risks are distinguished: production risks (associated with the production of products, services, a possible decrease in the expected volume of production, unforeseen increases in costs, etc.); commercial (arising in the process of selling products and services when prices change, a decrease in sales, an increase in distribution costs, etc.); financial R. (appearing in the process of relations between the company and banks and other financial institutions as a result of an unforeseen increase in interest rates for loans, changes in the tax system, etc.). R. are measured by frequency, the probability of occurrence of a particular level of losses. According to the level of losses, R. can be admissible (the threat of loss of profit or part of the profit); critical (threat of shortfall in revenue, non-coverage of costs incurred); catastrophic (threat of loss of property, bankruptcy).
4) - the risk of unforeseen losses of expected profits, income or property, cash in connection with an accidental change in the conditions of economic activity, unfavorable, including force majeure, circumstances, a general drop in prices in the market; the possibility of obtaining an unpredictable result, depending on the adopted economic decision, action. It is measured by frequency, the probability of occurrence of a certain level of losses. The most dangerous are the risks with a tangible probability of the level of losses exceeding the value of the expected profit. It is customary to distinguish the following types of risk: banking risk - the risk that commercial banks are exposed to; currency risk - the risk associated with an unforeseen change in the exchange rate of foreign currencies; credit risk - the risk associated with the risk of non-repayment, incomplete repayment or untimely repayment of loans; interest rate risk - the risk associated with unforeseen changes in interest rates; investment risk - the likelihood of incurring losses or not making a profit as a result of investing capital in stock values or placing resources; political risk - the risk caused by the influence of political changes and military conflicts on economic processes; risk of infection - the risk that the problems of subsidiaries will spread to the parent company. Business risks are often viewed as "non-insured risks", which are therefore subject to compulsory insurance, for which pools and associations of insurers are created.
Excellent definition
Incomplete definition ↓
Risk- this is the possibility of an unfavorable situation or an unsuccessful outcome of production and economic or any other activity.
Adverse situation or unsuccessful outcome in this case, there may be:
- lost profit;
- loss (loss of own funds);
- no result (no profit, no loss);
- shortfall in income or profit;
- an event that may lead to losses or loss of income in the future.
Main characteristics of risks
Economic nature. Risk is characterized as an economic category, occupying a certain place in the system of economic concepts associated with the implementation of the economic process of the enterprise. It manifests itself in the field of economic activity of the enterprise, is directly related to the formation of its profits and is often characterized by possible economic consequences in the process of implementation.
Objectivity of manifestation. Risk is an objective phenomenon in the activities of an enterprise, i.e. accompanies everything and all directions of his activity. Despite the fact that a number of risk parameters depend on subjective management decisions, the objective nature of its manifestation remains unchanged.
The likelihood of occurrence. It manifests itself in the fact that a risk event may or may not occur in the process of carrying out the financial and economic activities of the enterprise. The degree of this probability is determined by the action of both objective and subjective factors, however, the probabilistic nature of financial risk is its constant characteristic.
Uncertainty of consequences. The consequences of a financial and business transaction depend on the type of risk and can fluctuate within a fairly significant range. In other words, the risk can be accompanied by both financial losses for the enterprise and the formation of its additional income. This characteristic of risk means the indeterminacy (lack of regularity in the appearance) of its financial results, primarily the level of profitability of the operations performed.
The expected adverse effects. Although the consequences of risk manifestation can be characterized by both negative and positive indicators of the performance of financial and economic activities, risk in business practice is characterized and measured by the level of possible adverse consequences. This is due to the fact that a number of consequences of risk determine the loss of not only income, but also the capital of the enterprise, which leads to bankruptcy (that is, to irreversible negative consequences for its activities).
Level variability. The level of risk typical for a particular operation or for a certain line of business of an enterprise is not constant. It changes over time (depends on the duration of the operation, since the time factor has an independent effect on the level of risk, manifested through the level of liquidity of the invested financial resources, the uncertainty of the movement of the interest rate on, etc.) and under the influence of other objective and subjective factors which are in constant dynamics.
The subjectivity of the assessment. Despite the fact that risk as an economic phenomenon has an objective nature, its estimated indicator - the level of risk - is subjective. This subjectivity (unequal assessment of this objective phenomenon) is determined by different levels of completeness and reliability of the information base, qualifications of financial managers, their experience in the field of risk management and other factors.
Risk classification
Types of risks by type of hazard:- Technogenic risks- these are the risks associated with human economic activities (for example, environmental pollution).
- Natural risks- these are risks that do not depend on human activities (for example, an earthquake).
- Mixed risks- these are risks that are events, but associated with human economic activities (for example, a landslide associated with construction work).
- Political risks- these are the risks of direct losses and losses or loss of profit due to unfavorable changes in the political situation in the state or actions of local authorities.
- Social risks Are the risks associated with social crises.
- Environmental risks- these are risks associated with the likelihood of civil liability for damage to the environment, as well as the life and health of third parties.
- Commercial risks- these are the risks of economic losses arising in any commercial, production and economic activity. Commercial risks include financial risks (associated with the implementation of financial transactions) and production risks (associated with the production of products (works, services), the implementation of any types of production activities).
- Professional risks- these are the risks associated with the performance of professional duties (for example, the risks associated with the professional activities of doctors, notaries, etc.).
- Forecasted risks- these are risks associated with the cyclical development of the economy, changing stages of the financial market conjuncture, predictable development of competition, etc. The predictability of risks is relative, since forecasting with a 100% result excludes the phenomenon under consideration from the risk category. For example, inflationary risk, interest rate risk and some of their other types.
- Unpredictable risks- these are risks characterized by complete unpredictability of manifestation. For example, force majeure risks, tax risk, etc.
According to this classification criterion, risks are also divided into regulated and unregulated within the enterprise.
Types of risks by sources of occurrence:
- External (systematic or market) risk- this is a risk that does not depend on the activities of the enterprise. This risk arises when certain stages of the economic cycle change, changes in the financial market conditions and in a number of other cases that the company cannot influence in its activities. This group of risks can include inflation risk, interest rate risk, currency risk, tax risk.
- Internal (unsystematic or specific) risk Is a risk that depends on the activities of a particular enterprise. It can be associated with unskilled financial management, ineffective structure of assets and capital, excessive adherence to risky (aggressive) operations with a high rate of return, underestimation of business partners and other factors, the negative consequences of which can be largely prevented through effective risk management.
- Acceptable risk- this is a risk, losses for which do not exceed the estimated amount of profit for the operation being carried out.
- Critical risk- this is a risk, losses for which do not exceed the estimated amount of gross income from the operation being carried out.
- Catastrophic risk- this is a risk, losses for which are determined by partial or complete loss of equity capital (may be accompanied by a loss of borrowed capital).
- Simple risk characterizes the type of risk that is not subdivided into its individual subspecies. For example, inflationary risk.
- Complex risk characterizes the type of risk, which consists of a complex of subspecies. For example, investment risk (the risk of an investment project and the risk of a specific financial instrument).
- Risk that only entails economic losses carries only negative consequences (loss of income or capital).
- Lost profit risk characterizes a situation when an enterprise, due to the existing objective and subjective reasons, cannot carry out the planned operation (for example, if the credit rating is downgraded, the enterprise cannot get the necessary loan).
- The risk entailing both economic losses and additional income (« speculative financial risk "), is inherent, as a rule, in speculative financial transactions (for example, the risk of realizing a real investment project, the profitability of which in the operational stage may be lower or higher than the calculated level).
- Permanent risk characteristic for the entire period of the operation and is associated with the action of constant factors. For example, interest rate risk, foreign exchange risk, etc.
- Temporary risk characterizes the risk, which is of a permanent nature, arising only at certain stages of the implementation of a financial transaction. For example, the risk of the company's insolvency.
- Insured risks- these are risks that can be transferred through external insurance to the relevant insurance organizations.
- Insurable risks- these are risks for which there is no supply of relevant insurance products in the insurance market.
The composition of the risks of these two groups under consideration is very mobile and is associated not only with the possibility of predicting them, but also with the effectiveness of the implementation of certain types of insurance operations in specific economic conditions under the established forms of state regulation of insurance activities.
Types of risks by frequency of implementation:- High risks- these are risks, which are characterized by a high frequency of damage.
- Medium risks- these are risks, which are characterized by an average frequency of damage.
- Small risks- these are risks, which are characterized by a low probability of damage occurring.
Outcome, with the obligatory presence of adverse consequences.
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Subtitles
Etymology
Specifications
Risk always assumes a probabilistic nature of the outcome, while basically the word risk is most often understood as the probability of obtaining an unfavorable result (losses), although it can also be described as the likelihood of obtaining a result that is different from the expected one. In this sense, it becomes possible to talk about both the risk of losses and the risk of excess profits.
In financial circles, risk is a concept that refers to the human expectation of an event. Here, it can denote a potentially undesirable effect on an asset or its characteristics, which may arise from some past, present or future event. In common use, risk is often used synonymously with the likelihood of loss or threat.
In professional risk assessments, risk usually combines the likelihood of an event occurring with the impact it might produce and the circumstances surrounding it. developments... However, where assets are valued by the market, the probabilities and impacts of all events are integrally reflected in the market price, and therefore the risk arises only from changes in this price; this is one of the consequences of Black-Scholes estimation theory. From the point of view of RUP (Rational Unified Process), risk is an active / developing factor of a process that has the potential to negatively affect the course of the process.
Historically, risk theory is associated with insurance theory and actuarial calculations.
Currently, risk theory is being considered [ by whom?] as part of crisisology - the science of crises. [ ]
- “Presumed” indicates that an event is not predetermined, that is, it may or may not happen.
- "Presumptiveness" carries in itself a certain, presupposing side, characteristic of the probability of an event.
- "Presumptiveness" indicates that this assumption is the result of the subjective opinion of a thinking being about an event that has not yet taken place in the future period.
- "Potential to cause damage or loss", in addition to uncertainty, indicates the negativity of the possible consequences.
- “Damage or loss” is intentionally not replaced in the definition by “negative consequences” only because it is important for riskology and risk management to have a subjective assessment of possible consequences.
- “Damage or loss” is understood in the broadest sense of negative consequences: from loss of mood and material costs, lost profits, damage to the image, to financial losses and loss of health.
- “Anyone” indicates that the risk belongs.
- “Presumptive” in combination with “someone” means that the presupposing subject (the subject analyzing and assessing the risk) and “anyone” (the subject who owns the risk and its consequences) are not necessarily the same person ...
The "risk" itself, as follows from the definition, has characteristic properties:
- Uncertainty. Risk exists if and only if more than one development of events is possible.
- Damage. The risk exists when the outcome can lead to damage (loss) or other negative (only negative!) Consequences.
- Availability of analysis. The risk exists only when a subjective opinion of the “supportive” about the situation is formed and a qualitative or quantitative assessment of the negative event of the future period is given (otherwise it is a threat or danger).
- Significance. Risk exists when the alleged event is of practical importance and affects the interests of at least one subject. There is no risk without belonging.
Risk functions
Some modern researchers of the unmanaged (unregulated, "wild") market and specific types of business believe that risk is inherent in stimulating and protective functions. The stimulating function has a constructive (creation of protective tools and devices) and destructive (adventurism, voluntarism) aspects. The protective function also has two aspects: historical and genetic (search for remedies) and socio-legal (the need for legislative consolidation of the concept of “legitimacy of risk”). Considering risk as a positive function, it was proposed to single out two more risk functions: compensating (the possibility of additional profit) and socio-economic (selective - allocating effective owners).
Main functions:
- Protective - manifested in the fact that for an economic entity (in some sectors of the public economy) the risk is a normal state, therefore, a rational attitude to failures should be developed;
- Analytical - the presence of risk implies the need to choose one of the possible options for the correct decision;
- Innovative - manifests itself in stimulating the search for unconventional solutions to problems;
- Regulatory - has a contradictory character and appears in two forms: constructive and destructive.
Concept development history
The study of risk is closely related to the development of the theory of probability.
... Uncertainty must be understood in some sense radically different from the familiar notion of risk from which it has never been properly separated. … The essential fact is that "risk" means in certain cases a quantity derived from a measurement, while in other cases it is something distinctly not of this nature; these are far-reaching and critical differences in the relations of phenomena, depending on which one of these two concepts is actually present and works. ... It will be shown that the measurable uncertainty, or the proper "risk", we will use this very term, differs from the non-measurable in such a way that the first is not really an uncertainty at all. |
It should be noted, and the direction of crisis-free and, therefore, minimizing the very concept of risk, economic development within the framework of equilibrium strategies, deeply studied by outstanding scientists and Nobel laureates such as V. Paretto, D. Nash, L. Shepley, V. Leontiev. In their theoretical works, uncertainty, as well as risk, was an extremely negative phenomenon, and the task of the researcher (manager) was to level or uncover it.
Scenario analysis
In the XX century, the so-called scenario analysis that ripened during the Cold War, confrontation between global powers, especially between the US and the USSR, but was not widespread in insurance circles until the 1970s, when the oil crisis erupted, which sparked the development of deeper, more comprehensive foresight in the insurance business. ... In other sectors of the economy and production, especially when creating automatic control systems, the concept of risk as an element of decision-making theory has been used constantly since the end of the 19th century.
The next round of development of a scientific approach to risk in a market economy was generated mainly by the interests of finance in the 1980s, when the so-called derivative financial instruments became widespread. However, most professionals far from mathematics did not accept scientific methods until the 1990s, when finally the power of computer computing made it possible to take into account a fairly wide range of data and present research results in an accessible form to the wide masses of non-professionals who make investment decisions.
A significant contribution to the theory of risk assessments was made during the development of assessments of radiation and environmental risks, when the theory of "non-threshold risks" triumphed.
Governments around the world make extensive use of sophisticated scientific risk assessment methods to establish the most appropriate standards, such as environmental regulation, which has already been done by the US EPA.
Risk psychology
In psychology, the term risk is associated with three areas of research:
- Risk as a measure of expected failure in performance. The risk weight is defined as the product of the probability of failure and the degree of adverse consequences.
- Risk as an action that threatens the subject with certain losses (loss, illness, other damage). Distinguish between motivated risk, which presupposes obtaining situational advantages in activities, unmotivated risk that does not have a rational basis; justified and unjustified risk.
- Risk as a situation of choice. The choice should be made between a less attractive, but more reliable strategy, and a more attractive, but less reliable ("Tit in the hands or pie in the sky").
The inclination to take risks is a fairly stable characteristic of the individual and is associated with such personality traits as impulsivity, independence, desire for success, and a tendency to dominate. Risk behavior is also influenced by culture and social conditions.
The opposite of risk is guarantees. Highlight guarantees of achievement (calculated for success) and guarantees of compensation (calculated for failure).
Regret
One effective way to deal with 'risk creation' problems is to assess or measure risk (although some argue that risk cannot be measured, but only assessed) is to ensure that scenarios are, as a strict rule, should include unpopular and possibly improbable (in a group) with a low likelihood of high impact "threat" and / or "event-vision". This allows risk assessors to subtly instill fear and other personal ideals so that people do things differently for any reason other than following formal requirements and instructions.
For example, a private advanced analyst with an air attack scenario might be able to mitigate this threat to the US budget. This could be accepted as a formal risk with a nominal low probability. This would allow threats to be dealt with even though the threats were rejected by senior government analysts. Even a small investment in diligence on this issue may have ruined or prevented such an attack - or at least “hedge” against a risk in which the public administration might be wrong.
Fear as an intuitive assessment of risk
At this time, we must rely on our own fears and hesitations to insulate ourselves from circumstances most deeply unknown to us. In his book The Gift of Fear, Gavin de Becker states: “True fear is a gift, a signal of survival, but only in the face of danger. All other unwarranted fears dominate us in a way that no other living creature on Earth can afford. It shouldn't be like that. " Risk must be defined to be the way we collectively measure and share this "true fear" - a fusion of rational doubt, reckless fear, and a host of other "non-quantitative" deviations in our own experience.
Theoretical risk
R (θ) = ∫ L (θ, δ (x)) × f (x | θ) dx (\ displaystyle R (\ theta) = \ int L (\ theta, \ delta (x)) \ times f (x | \ theta) \, dx) where: δ (x)= score, θ = score parameter.Effective risk
While it is usually not possible to directly measure effective risk, there are many informal methods used to assess or “measure” it. Formal methods most often measure one of the risk measures: the so-called VaR (Value At Risk).
For example technical risk:
R = P ⋅ L, (\ displaystyle \ mathbf (R) = \ mathbf (P) \ cdot \ mathbf (L),) where is the risk; - the probability of one undesirable event L (\ displaystyle \ mathbf (L))- the amount of money lost or victims as a result of one unwanted event.Risk R (\ displaystyle \ mathbf (R))- quantitative characteristics of the hazard, determined by the frequency of occurrence of the hazards. This is the ratio of the number of adverse consequences (the number of deaths, the number of cases of illness, disability, etc.) caused by the action on a person of a particular hazard N, (\ displaystyle \ mathbf (N),) to their possible number for a certain period Q (\ displaystyle \ mathbf (Q)):
R = N (t) / Q (f) (\ displaystyle \ mathbf (R) = \ mathbf (N) (t) / \ mathbf (Q) (f))where N (t) (\ displaystyle \ mathbf (N) (t))- quantitative indicator of the frequency of undesirable events per unit of time t (\ displaystyle t);
Q (f) (\ displaystyle \ mathbf (Q) (f))- the number of risk objects exposed to a particular risk factor f (\ displaystyle f).
Risk is a dimensionless quantity determined for a specific period of time.
Risk-sensitive industries
Some industries manage risk in a highly quantified way. These include the nuclear and aviation industries, where the potential failure of a complex set of systems under design could lead to highly undesirable outcomes. A common measure of risk for a particular class of events is
R = P ⋅ C, (\ displaystyle \ mathbf (R) = \ mathbf (P) \ cdot \ mathbf (C),)where P (\ displaystyle \ mathbf (P)) is the probability of an event, and C (\ displaystyle \ mathbf (C))- its "consequence". The total risk is the sum of the individual risks of individual classes. In the nuclear industry, "effect" is often measured by the level of radiological radiation outside the emitting area, the measurement is often combined in five or six bands, ten degrees wide.
Risks are assessed using event tree methods (see industrial safety). Where these risks are low, they are generally considered “broadly acceptable”. The higher level of risk (usually up to 10-100 times, considered widely acceptable) must be justified against the cost of reducing it and the possible benefits that make it bearable - these risks are considered “bearable”. Risks outside this level are classified as “intolerable”.
The level of risk "broadly acceptable" is taken into account by the governments of various countries - the earliest attempt was made by the British government and academic researcher F.R. Farmer ISBN 5-901039-12-2 copy) // Financial Analysts Journal, 60 (6), 19 -25. A paper exploring the foundations of risk
As a result of studying the materials of this chapter, the student must:
- know the concepts of "risk" and "uncertainty"; the history of the emergence of risk theory and its development; on what grounds the risks can be classified; how to use the classification to develop methods for their analysis and organize the risk management system;
- be able to to distinguish the views of scientists from different schools on the theoretical aspects of the categories "risk" and "uncertainty"; identify various types of risks, highlight and use systematic and non-systematic risks in the assessment of assets;
- own knowledge about modern theories of risk (portfolio, valuation of financial assets, valuation of options).
Definition of Risk and Uncertainty
It should be noted that the concept of "risk" has a rather long history, but various aspects of risk began to be actively studied in the late 19th - early 20th centuries. Interestingly, until the 17th century. there was no general concept to denote risk, it was believed that luck and misfortune were predetermined by fate and fortune.
In Ancient Greece, the mythologized worldview was based on the fact that the future is completely predetermined by the will and desire of the gods, i.e. absolutely does not depend on human behavior.
The emergence of world religions, and above all Christianity, has led to the fact that the future has acquired ambiguity. There was an understanding that the possibility of a "different" future both in real life and after death depends on human behavior. Therefore, there was responsibility for the consequences of their actions.
In the Middle Ages, there was a realization that the future depends not only on God. One of those who first raised this problem was an Italian monk, professor of mathematics, who lived in the 15th century, Luca Nachisli. During the Renaissance, a serious study of risk issues began. Thanks to the development of gambling, and above all the game of dice, it became possible to predict the future. While studying gambling, the French mathematician, philosopher and inventor Blaise Pascal in 1654 turned to the mathematician P. Fermat for help. As a result of the collaboration, the theory of probability was created. It has become a huge world outlook and practical leap, for the first time allowing to make quantitative predictions of the future. Since then, forecasting tools like fortune telling, sacrifice and delirium of the blessed have begun to recede into the past.
At the beginning of the 18th century. German mathematician G. Leibniz put forward an idea, and Swiss mathematician J. Bernoulli substantiated the law of large numbers and developed statistical procedures. Since 1725, when mortality tables were first applied by the government of England, this tool has rapidly spread throughout the world.
In 1730 the French mathematician A. Moivre introduced the concept of the structure of the normal distribution and the measure of risk - the standard deviation. In 1738, D. Bernoulli defined the expected utility, which ultimately relies on the modern theory of portfolio investment. Since 1763, thanks to Bayes' theorem (hypothesis theorem), the world has learned how the degree of awareness about the control object affects decision-making.
Thus, the discovery of new laws and the development of almost all modern risk management tools date back to the 17th – 18th centuries.
The new era has brought an awareness of risk as a key factor in human activity and one of the conditions for achieving success.
In the scientific literature, you can find various definitions of this concept. As a rule, the authors give them in relation to any specific activity. We will be primarily interested in the definitions given in the economic literature.
Peter Bernstein, in his history of risk management, points out that the word "risk" comes from the Old Italian risicare, meaning "to dare", and concludes that "in this sense, risk is more a choice than a lot."
In Webster's dictionary ( Webster "s Encyclopedic Unabridged Dictionary) "risk" is defined as "the likelihood of harm or loss", i.e. risk refers to the possibility of the occurrence of any unfavorable developments. This traditional concept of risk can be demonstrated by a number of definitions of risk given by domestic and foreign authors (Table 1.1).
Table 1.1
Risk definitions and their sources
The concept of "risk" |
Literary source |
|
A measure of the discrepancy between the different possible outcomes of the adoption of certain strategies |
Lopatnikov L.I. Moscow: Nauka, 1987 |
|
The likelihood (threat) of loss by the enterprise of part of its resources, loss of income or the appearance of additional costs as a result of the implementation of certain production or financial activities |
Grabovoi P.G., Petrova S. N. et al. Risks in modern business. M .: Alane, 1994 |
|
Possible danger of losses arising from the specifics of certain natural phenomena and types of activities of human society |
Balabanov I. T. Risk management. Moscow: Finance and Statistics, 1996 |
|
The likelihood of an unexpected impact on the economic process of certain factors, under the influence of which the result may deviate from the planned value |
Shenaev V. N., Irniyazov B. S. Project lending. Foreign experience and the possibility of using it in Russia. M .: Consultbankir, 1996. (Ser. "International banking business") |
|
Uncertainty associated with the value of investments at the end of the period |
Sharpe W. F. Alexander G. J., Bailey J. Investments: trans. from English M .: INFRA-M, 1997 |
|
The likelihood of an unfavorable outcome |
Van Horn J. Fundamentals of financial management: trans. from English / ed. I. I. Eliseeva. Moscow: Finance and Statistics, 1997 |
|
The level of financial loss, expressed:
|
Kovalev V.V. Financial analysis. Capital Management. Investment selection. Analysis of reporting. Moscow: Finance and Statistics, 1997 |
|
Possibility of an unfavorable outcome, i.e. the investor does not receive the expected profit |
Financial management: theory and practice: textbook / ed. E. S. Stoyanova. 5th ed., Rev. and add. Moscow: Perspective, 2002 |
|
Adequate characterization of the level of uncertainty associated with the possibility of unfavorable situations during the implementation of a business project, as well as the onset of unforeseen negative consequences for the implementation of the main goals set for the investor |
Tsarev V.V., Kantarovich A.A. Business value appraisal: theory and methodology. M .: Unity, 2007 |
If we compare the scope of definition of the concepts of risk, which were given above, it becomes obvious that they differ. There are many other definitions of risk within the traditional concept, but they are unlikely to change the overall picture.
An extended interpretation of risk is identified with the concept of uncertainty, which means the impossibility of accurately predicting the optimal vector of development of a complex system and carries not only the likelihood of negative consequences, but also positive opportunities. The following definitions illustrate an extended modern concept.
Risk is the uncertainty of future financial results.
Risk is the degree of uncertainty about the receipt of future net income.
Risk is the likelihood of non-receipt of income of the planned level in conditions of uncertainty accompanying the activities of the enterprise.
The close the relationship between risk, probability and uncertainty; the risk is based on the probabilistic nature of market activity and the uncertainty of the situation in its implementation. Therefore, in order to most accurately disclose the category "risk", it is necessary to define the concepts of "probability" and "uncertainty" underlying risks.
- Cm.: Vishnyakov Ya.D., Radaev V.N. General theory of risks: textbook. allowance. 2nd ed., Rev. M .: Academy, 2008. S. 14-15.
- Bernstein P. Against the Gods: Taming Risk: trans. from English M .: Olymp-Business, 2000.S. 26.
- Morgan J ... R. RiskMetrics - Technical Document. URL: jpmorgan.com
- Cm.: Kasyanenko T.G. Conceptual foundations of business valuation: a reflection of the peculiarities of the formation of professional valuation in Russia. SPb .: Publishing house SPbGUEF, 2006.S. 229-230.