Risk Taking

Definition

Frank H. Knight (1921) and Peter Drucker s

(1970) defined risk as a behavior of the
entrepreneur which reflects a persons
willingness to put his or her career and
financial security on the line and take risks
in the name of an idea, spending much time
as well as capital on an uncertain venture.

Uncertainty & risk

1.

2.

3.

Knight classified three types of uncertainty.

Risk, which is measurable statistically (such as the
probability of drawing a red color ball from a jar
containing 5 red balls and 5 white balls).
Ambiguity, which is hard to measure statistically (such
as the probability of drawing a red ball from a jar
containing 5 red balls but with an unknown number of
white balls).
True Uncertainty or Knightian Uncertainty, which is
impossible to estimate or predict statistically (such as
the probability of drawing a red ball from a jar whose
number of red balls is unknown as well as the number
of other colored balls).

Features of risk
Risk actually means calculated risk.
Risk can be taken at different level
Risk can be of various types- a)Pure Risk b)
Speculative Risk c)Commercial risk
d)
Insurable Risk e) Material Risk
f)
Consequential Risk
g) Social risk
h)
Legal risk
i) political risk
j) Market
risk.

Conditions for not taking

risk
No appetite for risk - cultural conditioning
Fear of failure
Lack of support from superior
Inherent comfort with the status quo
Global business is highly competitive and
emphasis is on result not attempts.

An example of types of Risk in

Banking sector
Liquidity risk Commercial risk
Operating risk
Solvency risk
Human risk
Others risk

Enterprise risk
Management

The COSO "Enterprise Risk ManagementIntegrated Framework" published in 2004

defines ERM as a "process, effected by an
entity's board of directors, management, and
other personnel, applied in strategy setting
and across the enterprise, designed to
identify potential events that may affect the
entity, and manage risk to be within its risk
appetite, to provide reasonable assurance
regarding the achievement of entity
objectives.

In 2003, the Casualty Actuarial Society (CAS)

defined ERM as the discipline by which an
organization in any industry assesses,
controls, exploits, finances, and monitors
risks from all sources for the purpose of
increasing the organization's short- and longterm value to its stakeholders.
The CAS conceptualized ERM as proceeding
across the two dimensions of risk type and
risk management processes

Risk response strategy

Risk response strategy adopted by
management involves the followings:
Avoidance: exiting the activities giving rise
to risk
Reduction: taking action to reduce the
likelihood or impact related to the risk
Share or insure: transferring or sharing a
portion of the risk, to reduce it
Accept: no action is taken, due to a
cost/benefit decision

Risk type
The risk types and examples include:
Hazard risk : Liability torts, Property
damage, Natural catastrophe.
Financial risk : Pricing risk, Asset risk,
Currency risk, Liquidity risk
Operational risk : Customer satisfaction,
Product failure, Integrity, Reputational risk
Strategic risks : Competition, Social trend,
Capital availability.

Risk Management Process

Establishing Context: This includes an understanding of

the current conditions in which the organization operates on
an internal, external and risk management context.
Identifying Risks: This includes the documentation of the
material threats to the organizations achievement of its
objectives and the representation of areas to the
organization may exploit for competitive advantage.
Analyzing/Quantifying Risks: This includes the calibration
and, if possible, creation of probability distributions of
outcomes for each material risk.
Integrating Risks: This includes the aggregation of all risk
distributions, reflecting correlations and portfolio effects, and
the formulation of the results in terms of impact on the
organizations key performance metrics.

Continued..
Assessing/Prioritizing Risks: This
includes the determination of the
contribution of each risk to the aggregate
risk profile, and appropriate prioritization.
Treating/Exploiting Risks: This includes
the development of strategies for
controlling and exploiting the various risks.
Monitoring and Reviewing: This includes
the continual measurement and monitoring
of the risk environment and the
performance of the risk management
strategies.