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Risk management

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Risk management is the process of identifying, evaluating, and prioritizing uncertainties. It involves minimizing, monitoring, and controlling the impact or probability of these events. In this context, risk is defined as the possibility of an event occurring that adversely affects an objective. Because risk is tied to uncertainty, managers must prepare for things they cannot perfectly predict.

ISS impact risk
ISS impact risk

Modern risk management is used across many fields. These include engineering, finance, public health, and project management. By studying risks, organizations can protect their reputation, safety, and financial success.

The mechanism of risk management follows a specific sequence of steps. First, professionals must identify potential threats. Next, they assess how vulnerable critical assets are to those specific threats. They then determine the actual risk by calculating the expected likelihood and the consequences of an attack or event. After this, they identify ways to reduce those risks. Finally, they prioritize these reduction measures.

Risk in Banking
Risk in Banking

This systematic approach ensures that resources are not wasted on minor issues while major threats remain unaddressed.

There are two distinct types of events analyzed in this field: risks and opportunities. Negative events are classified as risks, which are often called threats. These are uncertainties with negative consequences. Conversely, positive events are classified as opportunities. These are uncertain future states that offer benefits. While most research focuses on threats, modern theory treats both as essential. Strategies for opportunities include exploiting, sharing, enhancing, or ignoring them. Strategies for threats include avoiding, reducing, transferring, or retaining the consequences.

ISS impact risk
ISS impact risk

Risk management has a clear history of development. It appeared in scientific and management literature as early as the 1920s. It became a formal science in the 1950s when books specifically titled "risk management" began appearing in library searches. Much of this early research focused on finance and insurance. The field also evolved in how it views opportunities. The 1987 PMBoK draft did not mention opportunities at all. However, by the 1990s, academic research began including them. By the 2000s, "opportunity management" became a significant part of project risk management.

Standards provide structure for these complex processes. The International Organization for Standardization (ISO) provides several guidelines. ISO 31000 offers general guidelines, while ISO Guide 31073:2022 clarifies specific vocabulary. Other institutions, such as the Project Management Institute, have developed their own standards. Organizations often use different methods depending on their needs. For example, they might use objectives-based identification or scenario-based analysis. They may also use taxonomy-based identification, which breaks down risk sources into categories using questionnaires.

Risk in Banking
Risk in Banking

Professional roles are divided to handle different aspects of the process. A Risk Manager oversees a comprehensive program. They assess risks that could impede an organization's safety or financial success. They develop plans to mitigate negative outcomes. Risk Analysts support the technical side of this work. They compile and evaluate risk data. Once the data is ready, analysts share their findings with managers. Managers then use these insights to decide on specific solutions.

ISS impact risk
ISS impact risk

Effective risk management requires understanding the nature of the risk itself. The mathematician Benoit Mandelbrot distinguished between "mild" and "wild" risk. Mild risk follows predictable patterns, such as normal probability distributions. These risks are subject to the law of large numbers and are relatively easy to manage. Wild risk follows "fat-tailed" distributions, such as Pareto or power-law distributions. These are extremely difficult or impossible to predict. Mandelbrot argued that assuming a wild risk is actually mild is a common and dangerous error.

Risk in Banking
Risk in Banking

Finally, risk management is deeply connected to resource allocation and decision-making. Managers face the challenge of opportunity cost. They must decide when to spend resources on mitigation and when to use those resources elsewhere. Ideally, the value created by mitigating a risk should be greater than the cost of doing nothing. This requires a dynamic and iterative process. It must be integrated into the organization's decision-making and remain flexible to change. Successful management optimizes resource usage while minimizing negative effects.

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