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Foundations of Risk Management in Business

Risk is one of those words that takes on a myriad of meanings, depending upon the discipline. From, as a noun, "risk" is defined as:
1. The possibility of suffering harm or loss; danger.
2. A factor, thing, element, or course involving uncertain danger; a hazard: "the usual risks of the desert: rattlesnakes, the heat, and lack of water" (Frank Clancy).
3a. The danger or probability of loss to an insurer.
3b. The amount that an insurance company stands to lose.
4a. The variability of returns from an investment.
4b. The chance of nonpayment of a debt.
5. One considered with respect to the possibility of loss: a poor risk.

You are a decision-maker, but you do not have a crystal ball in your toolkit (at least, not a reliable one!) -- so you cannot see the future. Yet, you know that "One of the trickiest problems in dealing with an uncertain future is people's seemingly irrational response to it." (Living Dangerously) And, "Human intuition is a bad guide to handling risk." (Freud, Finance & Folly).

So, what do you do? How do you factor in risk in your decision-making? What role do you think "what-if" scenarios should play?

Solution Preview

When making decisions involving risk in business, decision makers must evaluate the probability and the impact of the risk. The decision on weather to move forward with a project really depends on how identified risks are scored based on these two ...

Solution Summary

This solution examines the role of probability and impact in risk management.