Professor Forman

2 Contradictory Definitions of Risk

Several different and contradictory definitions of risk exist today. Haimes[1] writes that:

A universally agreed-upon definition of risk has been difficult to develop; one reason is that the concept is multidimensional and nuanced.

Andretta[1] writes:

Despite its successes in many applicative fields, there is still not a well-established vision and universally accepted definition of the principles and fundamental concepts of the risk assessment discipline. 

Hubbard[2] writes:

Concepts about risk and even the word risk are a source of considerable confusion even among those who specialize in the topic. There are a lot of well-entrenched and mutually exclusive ideas about risk and risk management and if we are going to make any progress, we have to work out these differences.
You might think that agreement on what the word risk means should be relatively simple and, for that matter, should have been resolved long ago. If only that were the case. Multiple definitions have evolved in multiple professions. Even worse, some will not even know they are using it differently from others and may incorrectly believe they are clearly communicating with other risk professionals.

It is very common to hear people speak of ‘risk – reward’ or risk vs. reward.

To assess and manage risk we will need to address problems arising from alternative definitions and agree on a definition that will permit a comprehensive and scientifically valid framework. The alternative definitions we will look at in Section 4.4 below include:

The traditional definition of risk as expected loss (likelihood multiplied by impact);

Knight’s definition of risk as uncertainty (see below);

The economists’ definition as variability (see below).

These definitions are inconsistent with one another, and that results not only in miscommunication but hinders measuring and managing risk in a scientifically sound way.

In addition to these three definitions, a considerable amount of ink has been spent on the debate about ‘upside risk’ – a notion that is nonsensical to those who define risk as a loss, to be reduced where possible, but which makes a great deal of sense to those who take risk in the pursuit of rewards or opportunities.  In Section 4.4 below we propose definitions of terms and processes that are consistent and allow for operationalizing Enterprise, Risk Management (ERM).

[1] Andretta, M. 2014, “Some Considerations on the Definition of Risk Based on Concepts of Systems Theory and Probability”, Risk Analysis, vol. 34, no. 7, pp. 1184-1195.

[2] Hubbard, Douglas W., 2009, The Failure of Risk Management – Why It’s Broken and How to Fix It, Wiley.

[1]Haimes, Y.Y. 2009, “On the complex definition of risk: a systems-based approach”, Risk Analysis: an official publication of the Society for Risk Analysis, vol. 29, no. 12, pp. 1647-1654.

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