Risk Management Dr. Nyce
Terms in this set (42)
Uncertainty regarding loss.
How often something happens
How bad it is when something happens.
Refers to frequency.
Refers to severity.
Involves only two potential outcomes, either loss or no loss.
Ex: When you leave class you car is either there or it was stolen.
Risk where you may have a loss or no loss, but also have a gain.
Ex: Buying a share of Google, it can go up in value, go down, or remain the same.
Risks that are unchanging through time.
Ex: The chance of an earthquake or the chance. They don't change from day to day or even year to year.
Risks that are changing through time.
Ex: The risk of identity theft. Credit cards are easy to steal, etc.
Risks that affect a large portion of the population at a given time.
Ex: A hurricane, or health pandemic.
Risks that only affect a single person, or small group of people at a given time.
Ex: An auto accident.
Risks that are inherent to the fundamental activities of an organization.
Ex: UPS and the risk of traffic accidents.
Risks that are not part of the core operations of an organization.
Ex: Speculative derivative trading by UPS.
Risks that are directly related to an individual's life, health or safety.
Risks that are directly related to the potential for damage to physical property (buildings, car, jewelry, etc)
Risks that are directly related to an individual being held liable for its actions or inactions.
Ex: Inflicting physical harm or another individual or damaging someone else's property.
Risks that are directly related to the financial standing of an individual or organization.
Ex: Investment risks, new product launches, etc..
Person/organization or property facing the risk of loss.
The immediate cause of loss.
Condition affecting the frequency or severity of the loss.
Ex: a wet floor makes it more likely someone will slip and fall.
Attitude/behavior that affects the frequency/severity of loss.
Ex: Not being careful with your cell phone because you purchased the insurance coverage on it.
Legal/cultural/attitude that affects the frequency/severity of loss.
Ex: How easy or hard it is to sue someone who has caused you a loss.
Indifferent toward risk; the value of any risky situation is the expected outcome.
Prefer to avoid risk; willing to pay to remove risk.
Prefer risk to no risk; willing to gamble, or take on risk at values below expected value.
What are the Five Rules of Thumb?
1. Recognize you need a model
2. Acknowledge your models limitations
3. Expect the unexpected
4. Understand the user
5. Check the infrastructure
One of the core concepts of the reading "A Scientific View of Risk" is:
Risk reduction has both monetary and non-monetary costs
Karen won't allow any of the neighborhood children into her yard because she has a large swimming pool and doesn't want anyone to fall in, resulting in her being responsible for the harm of a child. What type of risk is Karen trying to avoid?
Why should we measure loss severity?
Measured to help determine risk classification and determination of transfer amounts.
Risks affecting a large portion of the population at a given time are which of the following?
Gary works in a factory where the workers are known to leave oily rags all over the place. Which of the following best describes the oily rags?
Loss frequency describes which of the following?
Number of losses
Which of the following is the last step in the risk management process (but often done first)?
Review and evaluate
The reading "A Scientific View of Risk" has a different definition of risk than we have used in class. The definition used in this reading added what component to the definition?
A time element (given period of time)
One of the examples used in "A Scientific View of Risk" is that 1 in 8 women will develop breast cancer. This statistic is for women who live to be 95 years old. This example measures the likelihood of developing cancer over an entire lifetime. This ignores some information, what information is ignored?
The number of days of life lost.
Which of the following is a common pre-loss objective?
We are uncertain about the various events then we may treat them as equally probable.
Maximin and Minimax Principle
Pessimistic decision-makers who are conservative in their approach. Pick the action that gives you the least worst case scenario. Choose max profit, min cost.
Maximax and Minimin Principle
Optimists' principle of choice. What gives you the max profit.
Maximum Likelihood Principle
Pick the row with the highest probability and the column with the highest value in that row.
Outcomes X Prob + Outcome X Prob- etc. Do for each action/ even and choose the highest.
Is used most by organizations decision makers.