I believe it was Chaucer, in his masterpiece The Canterbury Tales, who wrote this classic line:
'To manage risk, one must first know what it is.'
Ok, I made up the whole Chaucer part. Still, it is pretty hard for businesses to master the art and science of risk management without first defining risk itself.
So, what is risk? Well, here is a nice compact definition I like:
1. Risk equals the inherent chance of a bad result from a decision or course of action.
Not wordy enough for you? No worries. Here is a bit more expansive definition of risk:
2. Risk is a foreseeable possibility that an uncertain future will produce an unexpected negative outcome. The more risk a given action carries, the greater the chance for bad results and/or increased negative consequences.
What about the risk of an expected negative outcome? I suppose you could classify the chance of a bad result from a highly speculative venture or investment (which, by definition, one would expect to result in financial loss) as a risk. But is taking a flier on a long-shot with the hope of winning big an activity that really falls under the umbrella of risk management? I don't think so. Thus, from a risk manager's perspective, I believe we can exclude from our definition of risk the odds of taking expected losses from highly speculative activities.
Or can we? I suppose one might argue that deciding whether or not to take a flier in the first place is itself a kind of risk management. Still, to me, high risk ventures and investments have more to do with decisions about policies and objectives than they do with risk management.
I like definition 1, above, better than definition 2, because 1 is short and to the point. If you disagree and/or have a good definition for risk, feel free to comment below...
By Brett Sherman; The Sherman Law Firm