Slide: Introduction
Welcome to the first lecture for the module Risk Management, we’re going to start with three short introductory lectures.
Slide 1: Risk Management
To begin with, we want to ask the question – why study Risk Management? Why is it an important topic and how does it feature in our various masters programmes? Risk Management is a discipline that is practiced widely across a variety of businesses and companies:
Whether it’s concerning the health and safety of the company employees,
Whether we’re looking at specialist applications to do with finance and insurance,
Whether we are trying to successfully manage projects or supply chains,
Whether we’re interested in the security of our IT or data systems
Whether we’re concerned with the complete Risk Management of our whole enterprise
Risk Management is something that features all over the workplace and all of us at some stage will interact or engage with aspects of Risk Management. However, Risk Management also features in our personal and private lives – each of us makes key decisions in our lives that are influenced by a variety of risks.
Slide 2: Module Objectives
Develop these skills for managing risk in these different situations – both professional and personal
We aim to consider and learn from ‘wisdom’ of the experts in the fields and the various professional bodies
But in order to get a grasp of the underlying rational of risk management, we’re going in these introductory lectures by looking at the fundamentals
Slide 3: Section 1: Introduction
In this lecture we will look at definitions of risk and the history and development of Risk
Management. In the second lecture we’ll look at issues to do with personality and how that influences our behaviour and thirdly we will introduce the topic of uncertainty and look at how that effects our ability to forecast the future.
Slide 4: Introduction to Risk and Risk Management
To begin with the key item is what do we actually mean by the word ‘risk’? As we will see there are a number of definitions that we could use.
Slide 5: Risk Definitions
The Oxford dictionary defines risk as “A situation involving exposure to danger: the possibility that something unpleasant or unwelcome will happen: a person or thing regarded as a threat or likely source of danger: a possibility of harm or damage against which something is insured; a person or thing regarded as likely to turn out well or badly in a particular context or respect: the possibility of financial loss.” So as you can see in that definition the focus is on negative outcomes, the ‘downside’.
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Slide 6: Risk Definitions
A slightly different definition is provided by Wikipedia “Risk concerns the deviation of one or more results of one or more future events from their expected value. Technically, the value of those results may be positive or negative. However, general usage tends to focus only on potential harm that may arise from a future event, which may accrue either from incurring a cost ("downside risk") or by failing to attain some benefit ("upside risk"). “
Slide 7: Risk Definitions
Our third definition comes from the Institute of Risk Management (IRM) and they are one of the main professional bodies concerned with the development and practice of Risk Management – and they say “Risk can be defined as the combination of the probability of an event and its consequences. In all types of undertaking, there is the potential for events and consequences that constitute opportunities for benefit (upside) or threats to success (downside). Risk Management is increasingly recognised as being concerned with both positive and negative aspects of risk.
Therefore this standard considers risk from both perspectives. In the safety field, it is generally recognised that consequences are only negative and therefore the management of safety risk is focused on prevention and mitigation of harm. (Institute of Risk Management)”
Slide 8: Actions and Outcomes
We can illustrate a risk situation with the following diagram:
In many situations we are faced with a choice, we have alterative actions to take and in many cases one action has sure or a relatively sure outcome, we know what will happen when we make a decision. On the other hand when we have an alternative action, then the outcomes are not sure, there might be a gain and there might be a loss i.e. if we take the risky action, there is the chance of gain and there is the chance of loss.
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Slide 9: Is Risk Always Bad?
As we saw initial and previous definitions of risk very much concentrated on the downside, the negative outcomes. However we need to bear in mind, if try to avoid risks - if we don’t take risks, then the long-term outcome is negative, if not worse i.e., if we don’t take risks we don’t progress as individuals and we don’t progress in terms of businesses or companies. So risk is something we need to live with and therefore managing risk successfully is as important both privately and professionally.
Slide 10: Risk and Risk Management
For the purposes of this module, we’re going to use the IRM’s definition and in particular if you remember the first sentence said “Risk can be defined as the combination of the probability of an event and its consequences”. And it’s the introduction and focus on the word ‘probability’ that leads us onto thinking the process of Risk Management and in particular it explains that Risk Management is a relatively modern academic discipline.
Slide 11: History of Risk Management
Probability theory is a relatively new academic discipline, most mathematical disciplines we learn at school such as; arithmetic, algebra and geometry have a very long history stretching back several thousands of years and these disciplines emerged and developed right across the world. On the other hand statistics and probability theory only emerged in the 17 th century in renascence Europe, why?
Slide 12: History of Risk Management
Why are statistics and probability such young subjects? There’s been a great deal of academic debate about this, various ideas and suggestions regarding this; was it the influence of religions and philosophies that meant people were reluctant or uninterested in discussing uncertainty. When statistical theory did start to be developed it was a result of people interested in gambling, is gambling a modern phenomenon; are there other reasons? In particular, what are the consequences for Risk Management of this late development?
Slide 13: Risk Management Today
Despite its late start, Risk Management today is a well-established professional discipline, universities; the academic world includes many Professors of Risk, a variety courses and qualifications. In the work place we will see there are a whole range of roles and job titles, such as
‘Risk Managers / Analyst’s’ who use and employ a whole range of methods and techniques which we’ll be looking at in the weeks to come. However despite the well-established nature of the discipline there are still issues, for example we see financial crashes, natural disasters along with man-made disasters and accidents.
Slide 14: Financial Crashes
As a result of the financial crash a very major company in Scotland, the Royal Bank of Scotland (RBS)
– almost went out of business. Another major British company BP (British Petroleum) as a result of the Deepwater Horizon disaster almost went out of business.
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Slide 15: Natural and Man-made Disasters
In the news, almost daily we see examples of natural and man-made disasters whether it’s to do with the environment, whether it’s to do with accidents, whether it’s to do with projects encountering difficulties we see the issues to do with Risk and Risk Management.
Slide 16: The Future of Risk Management
There is a wide spread realisation that Risk Management is a discipline that faces major challenges.
The fact that we are unable to predict natural disasters, the fact that we seem unable to avoid financial meltdowns has led to a great deal of self-reflection and analysis and amongst some of the literature this book by Douglas Hubbard called ‘The Failure of Risk Management’ is a very good critique of some of the pitfalls and problems that are still faced.
Slide 17: The Future of Risk Management
Elsewhere in the realm of economics for example a lot of leading academics and practitioners have realised that there are problems with our ability to predict financial crisis. So for example if you follow the links associated with this lecture you can see something called ‘The institute for New
Economic Thinking’, which was set up in the wake of the latest financial crisis with a lot of eminent economists thinking about how we rethink some very core theory, so in the future our financial Risk
Management will be better.
Slide 18: Summary
Just to sum up the first part of the introduction
We need to remember there are different interpretations on the meaning of Risk. Some people see
Risk Management as primarily avoiding hazards. Other people think more in terms of uncertainty management, trying to balance the possible outcomes whether they are positive or negative.
Slide 19: Summary
Risk Management is a well-established discipline, but it has its limitations, there have been critiques and challenges ahead. Essentially it’s a subject that is under development and in particular there are these key challenges – how do we avoid problems such as the impact of natural disasters or these financial crisis that seem to come around far too regularly.
So in studying this module, whilst we’re aiming to employ best practice we need to keep an open mind about what that best practice is.
Slide 20: And Finally…
Just a little diversion for you, the associated link (Youtube video) will hopefully give you a few ideas about how to go about your studies or maybe not.
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