Risk concerns the deviation of one or more results A result is the final consequence of a sequence of actions or events expressed qualitatively or quantitatively. Possible results include advantage, disadvantage, gain, injury, loss, value and victory. There may be a range of possible outcomes associated with an event depending on the point of view, historical distance or relevance. Reaching no of one or more future events In probability theory, an event is a set of outcomes to which a probability is assigned. Typically, when the sample space is finite, any subset of the sample space is an event (i.e. all elements of the power set of the sample space are defined as events). However, this approach does not work well in cases where the sample space is infinite, most from their expected value In probability theory and statistics, the expected value of a random variable is the integral of the random variable with respect to its probability measure. 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 In business, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In economics, a cost is an alternative that is given up as a result of a decision. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is ("downside risk") or by failing to attain some benefit ("upside risk").

Historical background

The term risk may be traced back to classical Greek rizikon (Greek ριζα, riza),^{[citation needed]} meaning root, later used in Latin Latin or sometimes Roman is an Italic language originally spoken in Latium and Ancient Rome. Although often considered a dead language, in view of the fact that it has no native speakers, a small number of scholars can fluently speak it and it continues to be taught in schools and universities and has been, and currently is, used in the process of for "cliff". The term is used in Homer Homer is a legendary ancient Greek epic poet, traditionally said to be the author of the epic poems the Iliad and the Odyssey. The ancient Greeks generally believed that Homer was an historical individual, but most scholars are skeptical: no reliable biographical information has been handed down from classical antiquity, and the poems themselves's Rhapsody M of Odyssey "Sirens, Scylla, Charybdee and the bulls of Helios (Sun)" Odysseus Odysseus or Ulysses (pronounced /juːˈlɪsiːz/; Latin: Ulyssēs, Ulixēs) was a legendary Greek king of Ithaca and the hero of Homer's epic poem the Odyssey. Odysseus also plays a key role in Homer's Iliad and other works in the Epic Cycle tried to save himself from Charybdee at the cliffs of Scylla In Greek mythology, Scylla was a monster that lived on one side of a narrow channel of water, opposite its counterpart Charybdis. The two sides of the strait were within an arrow's range of each other—so close that sailors attempting to avoid Charybdis would pass too close to Scylla and vice versa, where his ship was destroyed by heavy seas generated by Zeus In Greek mythology Zeus is the "Father of Gods and men", according to Hesiod's Theogony, who ruled the Olympians of Mount Olympus as a father ruled the family; he was the god of sky and thunder in Greek mythology. As Walter Burkert points out in his book, Greek Religion, "Even the gods who are not his natural children address him as as a punishment for his crew killing before the bulls of Helios (the god of the sun), by grapping the roots of a wild fig tree.

For the sociologist Niklas Luhmann Niklas Luhmann was a German sociologist, and a prominent thinker in sociological systems theory the term 'risk' is a neologism that appeared with the transition from traditional to modern society.^[1]"In the Middle Ages The Middle Ages is a period of European history from the 5th century to the 15th century. The period followed the fall of the Western Roman Empire in 476, and preceded the Early Modern Era. It is the middle period in a three-period division of history: Classical, Medieval, and Modern. The term "Middle Ages" (medium aevum) was coined in the term risicum was used in highly specific contexts, above all sea trade and its ensuing legal problems of loss and damage."^[1][2] In the vernacular languages A vernacular, mother tongue or mother language, and less frequently one sense of idiom and dialect, is the native language of a population located in a country or in a region defined on some other basis, such as a locality. For example, Navajo is a local language in the southwest of the United States, and English is the state language of a number of the 16th century the words rischio and riezgo were used,^[1] both terms derived from the Arabic word "رزق", "rizk", meaning 'to seek prosperity'. This was introduced to continental Europe, through interaction with Middle Eastern and North African Arab traders. In the English language the term risk appeared only in the 17th century, and "seems to be imported from continental Europe."^[1] When the terminology of risk took ground, it replaced the older notion that thought "in terms of good and bad fortune Luck or fortuity is good or bad fortune in life caused by accident or chance, and attributed by some to reasons of faith or superstition, which happens beyond a person's control."^[1] Niklas Luhmann (1996) seeks to explain this transition: "Perhaps, this was simply a loss of plausibility of the old rhetorics of Fortuna Fortuna was the goddess of fortune and personification of luck in Roman religion. She might bring good luck or bad: she could be represented as veiled and blind, as in modern depictions of Justice, and came to represent life's capriciousness. She was also a goddess of fate: as Atrox Fortuna, she claimed the young lives of the princeps Augustus' as an allegorical figure of religious content and of prudentia as a (noble) virtue in the emerging commercial society."^[3]

Scenario analysis Scenario analysis can also be used to illuminate "wild cards." For example, analysis of the possibility of the earth being struck by a large celestial object suggests that whilst the probability is low, the damage inflicted is so high that the event is much more important (threatening) than the low probability (in any one year) alone matured during Cold War The Cold War was the continuing state of political conflict, military tension, proxy wars, and economic competition existing after World War II (1939–1945), primarily between the Soviet Union and its satellite states, and the powers of the Western world, particularly the United States. Although the primary participants' military forces never confrontations between major powers A great power is a nation or state that has the ability to exert its influence on a global scale. Great powers characteristically possess economic, military, diplomatic, and cultural strength, which may cause other smaller nations to consider the opinions of great powers before taking actions of their own. International relations theorists have, notably the United States ^ b. English is the de facto language of American government and the sole language spoken at home by 80% of Americans age five and older. Spanish is the second most commonly spoken language and the Soviet Union The Union of Soviet Socialist Republics was a constitutionally socialist state that existed in Eurasia from 1922 to 1991. The name is a translation of the Russian: Союз Советских Социалистических Республик (help·info), tr. Soyuz Sovetskikh Sotsialisticheskikh Respublik, IPA [sɐˈjʊs sɐˈvʲeʦkʲɪx səʦɪ. It became widespread in insurance circles in the 1970s when major oil tanker disasters An oil spill is a release of a liquid petroleum hydrocarbon into the environment due to human activity, and is a form of pollution. The term often refers to marine oil spills, where oil is released into the ocean or coastal waters. Oil spills include releases of crude oil from tankers, offshore platforms, drilling rigs and wells, as well as spills forced a more comprehensive foresight.^{[citation needed]} The scientific approach to risk entered finance in the 1960s with the advent of the capital asset pricing model In finance, the capital asset pricing model is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic and became increasingly important in the 1980s when financial derivatives A derivative, in non-financial-expert terms, is an agreement or contract that is not based on a real, or true, exchange, i.e.: There is nothing tangible like money, or a product, that is being exchanged. For example, a person goes to the grocery store, exchanges a currency for a commodity (say, an apple). The exchange is complete, both parties proliferated. It reached general professions in the 1990s when the power of personal computing allowed for widespread data collection and numbers crunching.

Governments are using it, for example, to set standards for environmental regulation Environmental law is a complex and interlocking body of treaties, conventions, statutes, regulations, and common law that, very broadly, operate to regulate the interaction of humanity and the rest of the biophysical or natural environment, toward the purpose of reducing the impacts of human activity, both on the natural environment and on, e.g. "pathway analysis" as practiced by the United States Environmental Protection Agency The U.S. Environmental Protection Agency is an agency of the federal government of the United States charged to protect human health and the environment, by writing and enforcing regulations based on laws passed by Congress. The EPA was proposed by President Richard Nixon and began operation on December 2, 1970, when its establishment was passed.

Definitions of risk

There are different definitions of risk for each of several applications. The widely inconsistent and ambiguous use of the word is one of several current criticisms of the methods to manage risk.^[4]

In one definition, "risks" are simply future issues that can be avoided or mitigated, rather than present problems that must be immediately addressed.^[5]

In risk management Risk is defined in ISO 31000 as the effect of uncertainty on objectives . Risk management can therefore be considered the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the, the term "hazard A hazard is a situation that poses a level of threat to life, health, property, or environment. Most hazards are dormant or potential, with only a theoretical risk of harm; however, once a hazard becomes "active", it can create an emergency situation. A hazard does not exist when it is happening. A hazardous situation that has come to" is used to mean an event that could cause harm and the term "risk" is used to mean simply the probability of something happening.

OHSAS (Occupational Health & Safety Advisory Services) defines risk as the product of the probability of a hazard resulting in an adverse event, times the severity of the event.^[6] Mathematically, risk often simply defined as:

One of the first major uses of this concept was at the planning of the Delta Works The Delta Works are a series of constructions built between 1950 and 1997 in the southwest of the Netherlands to protect a large area of land around the Rhine-Meuse-Scheldt delta from the sea. The works consist of dams, sluices, locks, dikes, levies, and storm surge barriers. The aim of the dams, sluices, and storm surge barriers was to shorten in 1953, a flood protection program in the Netherlands The Netherlands (pronounced /ˈnɛðɚləndz/ ; Dutch: Nederland, pronounced [ˈneːdərlɑnt] ( listen)) is a constituent country of the Kingdom of the Netherlands, located in North-West Europe. It is a parliamentary democratic constitutional monarchy. The Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany, with the aid of the mathematician David van Dantzig David van Dantzig was a Dutch mathematician, well known for the construction in topology of the dyadic solenoid.^[7] The kind of risk analysis pioneered here has become common today in fields like nuclear power Nuclear power is produced by controlled nuclear reactions. Commercial and utility plants currently use nuclear fission reactions to heat water to produce steam, which is then used to generate electricity, aerospace Aerospace comprises the atmosphere of Earth and surrounding space. Typically the term is used to refer to the industry that researches, designs, manufactures, operates, and maintains vehicles moving through air and space. Aerospace is a very diverse field, with a multitude of commercial, industrial and military applications and the chemical industry The chemical industry comprises the companies that produce industrial chemicals. It is central to modern world economy, converting raw materials into more than 70,000 different products.

There are many formal methods used to assess or to "measure" risk, which many consider to be a critical factor in human decision making Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternatives. Every decision making process produces a final choice. The output can be an action or an opinion of choice. Some of these quantitative definitions of risk are well-grounded in sound statistics theory. However, these measurements of risk rely on failure occurrence data which may be sparse. This makes risk assessment difficult in hazardous industries such as nuclear energy where the frequency of failures is rare and harmful consequences of failure are astronomical. The dangerous harmful consequences often necessitate actions to reduce the probability of failure to infinitesimally small values which are hard to measure and corroborate with empirical evidence. Often, the probability Probability is a way of expressing knowledge or belief that an event will occur or has occurred. The concept has been given an exact mathematical meaning in probability theory, which is used extensively in such areas of study as mathematics, statistics, finance, gambling, science, and philosophy to draw conclusions about the likelihood of of a negative event is estimated by using the frequency of past similar events or by event-tree methods, but probabilities for rare failures may be difficult to estimate if an event tree cannot be formulated. Methods to calculate the cost of the loss of human life vary depending on the purpose of the calculation. Specific methods include what people are willing to pay to insure against death,^[8] and radiological release (e.g., GBq of radio-iodine).^{[citation needed]}

Financial risk Financial risk is normally any risk associated with any form of financing. Risk is probability of unfavorable condition; in financial sector it is the probability of actual return being less than expected return. There will be uncertainty in every business; the level of uncertainty present is called risk is often defined as the unexpected variability or volatility In finance, volatility most frequently refers to the standard deviation of the continuously compounded returns of a financial instrument within a specific time horizon. It is used to quantify the risk of the financial instrument over the specified time period. Volatility is normally expressed in annualized terms, and it may either be an absolute of returns and thus includes both potential worse-than-expected as well as better-than-expected returns. References to negative risk below should be read as applying to positive impacts or opportunity (e.g., for "loss" read "loss or gain") unless the context precludes this interpretation.

In statistics, risk is often mapped to the probability of some event seen as undesirable. Usually, the probability of that event and some assessment of its expected harm must be combined into a believable scenario A scenario is a synthetic description of an event or series of actions and events. In the Commedia dell'arte it was an outline of entrances, exits, and action describing the plot of a play that was literally pinned to the back of the scenery. It is also known as canovaccio or "that which is pinned to the canvas" of which the scenery was (an outcome), which combines the set of risk, regret and reward probabilities into an expected value In probability theory and statistics, the expected value of a random variable is the integral of the random variable with respect to its probability measure for that outcome. (See also Expected utility In economics, game theory, and decision theory the expected utility theorem or expected utility hypothesis is a theory of utility in which "betting preferences" of people with regard to uncertain outcomes is represented by a function of the payout (whether in money or other goods), the probability of occurrence, risk aversion, and the.)

Thus, in statistical decision theory Decision theory in economics, philosophy, mathematics and statistics is concerned with identifying the values, uncertainties and other issues relevant in a given decision, its rationality, and the resulting optimal decision. It is very closely related to the field of game theory, the risk function of an estimator In statistics, an estimator or point estimate is a statistic that is used to infer the value of an unknown parameter in a statistical model. The parameter being estimated is sometimes called the estimand. It can be either finite-dimensional (in parametric and semi-parametric models), or infinite-dimensional (semi-nonparametric and non-parametric δ(x) for a parameter In mathematics, statistics, and the mathematical sciences, a parameter is a quantity that serves to relate functions and variables using a common variable (often t) when such a relationship would be difficult to explicate with an equation. In different contexts the term may have special uses. Parameter- is a computation made from a population( θ, calculated from some observables In physics, particularly in quantum physics, a system observable is a property of the system state that can be determined by some sequence of physical operations. For example, these operations might involve submitting the system to various electromagnetic fields and eventually reading a value off some gauge. In systems governed by classical x, is defined as the expectation value of the loss function In statistics, decision theory and economics, a loss function is a function that maps an event onto a real number representing the economic cost or regret associated with the event L,

In information security Information security means protecting information and information systems from unauthorized access, use, disclosure, disruption, modification or destruction. Mainly the Information Security Consultants are associated with it^{[citation needed]}, a risk is written as an asset, the threats to the asset and the vulnerability that can be exploited by the threats to impact the asset - an example being: Our desktop computers (asset) can be compromised by malware (threat) entering the environment as an email attachment (vulnerability).

The risk is then assessed as a function of three variables:

1. the probability that there is a threat
2. the probability that there are any vulnerabilities Vulnerability is the susceptibility to physical or emotional injury or attack. It also means to have one's guard down, open to censure or criticism. Vulnerability refers to a person's state of being liable to succumb, as to manipulation, persuasion or temptation
3. the potential impact to the business.

The two probabilities are sometimes combined and are also known as likelihood. If any of these variables approaches zero, the overall risk approaches zero.

Risk versus uncertainty

Risk: Combination of the likelihood of an occurrence of a hazardous event or exposure(s) and the severity of injury or ill health that can be caused by the event or exposure(s)

In his seminal work Risk, Uncertainty, and Profit, Frank Knight Frank Hyneman Knight was an important economist of the twentieth century. He was born in McLean County, Illinois in a devoutly Christian family of farmers. He never completed high school but was admitted in 1905 to the American University in Tennessee. He graduated in 1911 from Milligan College. At the University of Tennessee he obtained a B.S (1921) established the distinction between risk and uncertainty Uncertainty is a term used in subtly different ways in a number of fields, including philosophy, physics, statistics, economics, finance, insurance, psychology, sociology, engineering, and information science. It applies to predictions of future events, to physical measurements already made, or to the unknown.

Thus, Knightian uncertainty Knightian uncertainty is named after University of Chicago economist Frank Knight , who distinguished risk and uncertainty in his work Risk, Uncertainty, and Profit: is immeasurable, not possible to calculate, while in the Knightian sense risk is measureable.

Another distinction between risk and uncertainty is proposed in How to Measure Anything: Finding the Value of Intangibles in Business and The Failure of Risk Management: Why It's Broken and How to Fix It by Doug Hubbard:^[9][10]

Uncertainty: The lack of complete certainty, that is, the existence of more than one possibility. The "true" outcome/state/result/value is not known.

Measurement of uncertainty: A set of probabilities assigned to a set of possibilities. Example: "There is a 60% chance this market will double in five years"

Risk: A state of uncertainty where some of the possibilities involve a loss, catastrophe, or other undesirable outcome.

Measurement of risk: A set of possibilities each with quantified probabilities and quantified losses. Example: "There is a 40% chance the proposed oil well will be dry with a loss of $12 million in exploratory drilling costs".

In this sense, Hubbard uses the terms so that one may have uncertainty without risk but not risk without uncertainty. We can be uncertain about the winner of a contest, but unless we have some personal stake in it, we have no risk. If we bet money on the outcome of the contest, then we have a risk. In both cases there are more than one outcome. The measure of uncertainty refers only to the probabilities assigned to outcomes, while the measure of risk requires both probabilities for outcomes and losses quantified for outcomes.

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• Political Risk Insurance: Encyclopedia
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