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Management of risks Risk management

Management of risks

Risk management is the process of making and implementing management decisions

 aimed at reducing the likelihood of an adverse outcome and minimizing possible project losses caused by its implementation.

In modern economics, there is no single well-established definition of the category risk,

but there are several definition traditions based on different generic categories of definition:

risk is understood as the antonym of chance, that is, the probability of not obtaining the desired result,

they also understand the very fact of a probable event, as a result of which only neutral or negative consequences,

they also understand the expected amount of damage, the object of possible loss,

random activity, assessments of forecast confidence, etc., then it was not investigated by experts in good faith.

These events (and not an event) are of a dual nature and can always (!) be divided into “chance”

(an expected event that can bring utility, benefit, or profit to someone ) and “risk”

(an expected event that can bring someone damage or loss). Dual events can be concomitant (the realization of a chance may entail risk or vice versa),

mutually exclusive (a toss game), or independent (the realization of a chance and risk does not depend on each other,

but is determined by circumstances and uncertainty).

That is why, in order to create a coherent system of views on risk management, all risks should be recognized as pure,

and dual events defined as “speculative” subject to re-analysis).

The purpose of risk management in the sphere is to increase the competitiveness of business entities by protecting against the realization of economic risks.

History of risk management theory edit

The theory of risk management is based on three basic concepts: utility, regression, and diversification.

In 1738, the Swiss mathematician Daniel Bernoulli supplemented the theory of probability with the method of usefulness

or attractiveness of one or another outcome of events. Bernoulli’s idea was that in the process of making a decision,

people pay more attention to the size of the consequences of different outcomes than to their probabilities.

At the end of the 19th century, the English researcher F.

Galton proposed to consider regression or return to the mean as a universal statistical pattern. 

The essence of regression was interpreted by him as the return of phenomena to normal over time. 

Subsequently, the regression rule was proven to work in a wide variety of situations,

from gambling and calculating the likelihood of accidents, to predicting fluctuations in economic cycles.

In 1952, a graduate student at the University of Chicago, Harry Markowitz, in the article

“Diversification of Investments” (“Portfolio Selection”) mathematically substantiated the strategy of diversifying an investment portfolio,

in particular, he showed how, through a thoughtful distribution of investments,

to minimize deviations in returns from the expected indicator. In 1990, G.

Markowitz was awarded the Nobel Prize for developing the theory and practice of optimizing a portfolio of stock assets.

According to alternative views on the history of the emergence and development of risk management,

the term itself first appeared about 50 years ago to describe the effectiveness of the acquisition of insurance coverage by insurers 

Stages of risk management edit

In risk management, it is customary to distinguish several key stages:

  1. identifying the risk and assessing the likelihood of its

    implementation and the scale of the consequences, determining the maximum possible loss ;
  2. selection of methods and tools for managing the identified risk;
  3. development of a risk strategy in order to reduce the likelihood

    of risk realization and minimize possible negative consequences;
  4. implementation of the risk strategy;
  5. assessment of the results achieved and adjustment of the risk strategy.

The key stage of risk management is the stage of choosing methods and tools for risk management.

Risk management methods and toolsEdit

Example of a risk analysis: NASA diagram showing areas of the ISS with a high risk of space debris impact.

The basic risk management methods are risk aversion, mitigation, transfer, and acceptance.

The risk toolkit is much wider. It includes political, organizational, legal, economic, and social instruments,

and risk management as a system allows for the simultaneous application of several methods and risk management tools.

The most commonly used risk management tool is insurance. 

Insurance involves the transfer of responsibility for compensation for the alleged damage to a third-party organization

( insurance company ). Examples of other tools might be:

  • refusal from excessively risky activities ( the refusal method ),
  • prevention or diversification ( decrease method ),
  • outsourcing or insurance of costly risky functions ( transfer method ),
  • and formation of reserves or stocks ( acceptance method ).
Eleena Wills
Hi, I’m Eleena Wills. Being a writer and blogger, I strive to provide informative and valuable articles to people. With quality, constructive, and well-researched articles, one can make informed choices. I cover a wide range of topics, from home improvement to hair styling and automotive.
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