Professor Forman

Differing definitions of risk

There are many definitions of risk that vary by specific application and situational context. The widely inconsistent and ambiguous use of the word is one of several current criticisms of the methods to manage risk.

Some of the more popular definitions:

  1. Classical/Scientific
    Expected Loss due to an uncertain event
    likelihood times impact of loss
  2. Knightean Uncertainty:
    Knight defined risk as a measurable uncertainty. According to this definition, no consequence is required for an event to be a risk.
  3. Financial Risk
  4. ISO
  5. PMI
  6. DHS
  7. COSO

1) Classical/Scientific

Risk concerns the expected value of one or more results (consequences) of one or more future events. Stated a bit differently, risk is an uncertain event that matters.
Technically, the value of those results (consequences) may be positive or negative.
However, general usage tends to focus only on potential harm that may arise from a future event.
The harm is a failure to achieve one or more objectives.

2) Knightean Uncertainty

Frank H. Knight (1885-1972) was a Professor of economics at the University of Chicago.
Knight tried to distinguish measurable uncertainty (probability distributions) from uncertainties that are not measured.
Loss is not a part of Knight’s definition.
According to Knight’s definition, someone who watching a roulette wheel at a casino without wagering any money is a risk. This definition is contrary to the notion that a risk is an uncertain event that matters.

more to come…

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