Risk and Risk-generating Events

Abstract

This chapter starts by indicating how necessary it is to bring together the disparate approaches to risk in a genuinely integrated manner which assimilates all risk factors and the different disciplinary approaches to risk. It defines what risk is and shows the universality of that risk with careful distinctions made between incidence, impact and response. The analysis shows how such risk-generating events might be classified. One method of classification is by the different levels at which risk arises and has to be controlled. The analysis then turns to the response to risk by considering the appetite for risk, or degree of risk aversion, of those confronting risk. Part of such an analysis is consideration of the nature of risk exposure for organisations and individuals, notably different stakeholder groups. In conclusion, the chapter analyses the connection between risk and return which is considered a positive one by financial theorists but paradoxically has appeared in the empirical data to be negative; successful organisations are able to increase returns and reduce risk simultaneously.

There are never likely to be enough major capital investment decisions facing a company within a reasonable period of time for it to be proved statistically that decisions taken on the basis of an analysis of the risks are better than those taken without any such analysis.

It should be recognised that the use of risk evaluation in business is in essence an ‘act of faith’.

(Hull 1980: 135)