Professor Forman

Risks we take

There are two kinds of risk: risks we take and risks we face. We take risks when making decisions involving either making a choice of one alternative from a set of alternatives, such as choosing a strategic direction, a chief executive officer, a design for a new product or process, a supplier for a new part; or choosing a combination or portfolio of alternatives such as a portfolio of investments, a portfolio of projects, or a combination of suppliers for component parts.

A rational decision is one which maximizes the achievement of objectives and is detetmined by prioritizing the importance of objectives and the preferences for the alternatives with respect to the objectives.

Objectives can include known or unknown benefits and costs.
Anticipated uncertain benefits are opportunities.
Anticipated uncertain costs (or losses) are risks.

When we make a decision, we are taking an alternative or portfolio of alternatives and thus taking benefits costs, opportunities, and risks.

Because humans are inherently loss averse, it is natural for special attention be paid to the risks being taken when making decisions.

Risk Informed Decision Making is a term used to describe a decision, such as evaluating alternatives for improving dam safety, where risk is of paramount importance.

%d bloggers like this: