A Simple Way to Understand Risk Management

Forget about textbooks, standards, and jargon. If you can grasp this, you’re ready to manage risks.

The Elements of Risk

1. Politics — Mass influences on policy shifts.

2. Economics — Competition for wealth.

3. Social — Culture, way of life and equality.

4. Technology — New tools and methods.

5. Environment — Biosphere: nature's living and non-living things.

6. Legal — Boundaries of allowable actions.

The Components of Risk

1. Risk — Future outcomes that you might not like.

2. Sources of Risk — Any object or action that can cause distress.

3. Causes of Risk — When your control mechanisms fail to manage sources of risk properly.

4. Risk Event — An occurrence you can detect and observe with your five senses, or computer sensors. It can initiate chains of events or it can occur independently with other events.

5. Risk Consequence — The final outcome that results in financial losses.

6. Risk Causality — A chain of risk events.

Measuring Risk

1. Possibility — Any event that can happen.

2. Probability — The likelihood of an event occurring.

3. Impact — The financial itself.

4. Risk Appetite — How aggressive you pursue risks.

5. Risk Tolerance — The strength of your defense and resilience.

6. Risk Severity — How bad is the situation relative to your tolerance.

Managing Risk

1. Risk Identification — Detecting and categorising risks.

2. Risk Analysis — Measuring the risks you have identified.

3. Risk Evaluation — Deciding how to address risk.

4. Risk Assessment = Risk Identification + Risk Analysis + Risk Evaluation

5. Risk Treatment — Finding ways to reduce risk.

6. Innovation — Applying creative approaches to risk treatment to develop optimized, stakeholder-accepted solutions.

How do Risks Manifest?

Everything is created to serve a purpose. People design tools, systems, and structures to ensure functionality. Being functional means fulfilling their purpose without breaking down. However, man-made products suffer from wear and tear, as well as external influences. Eventually, a source of risk malfunctions. We may not realize it yet because sensors are not placed at certain micro levels due to impracticality.

Soon, one part stops functioning properly, and the problem spreads through the system. A person or machine detects the failure. What you have just detected is the manifestation of a risk event.

Through causality principles, risk events trigger chain reactions that affect other areas. That is why a problem that starts with a small component in a complex system can eventually lead to a complete system failure.

The Most Important Features in Risk Management

For effective risk management, your model must have five key features:

1. Causality Map — To visualise how events interconnect and spread.

2. Probability Measures — You need real statistical data.

3. Impact Estimates — To assess financial implications and measure your risk management performance.

4. Risk Movement — Understanding how your risks evolveover time allows for better forecasting.

5. Innovation — You need structured tools and methodologies to sovle problems, not just brainstorming sessions. Creativity alone isn't enough — innovation requires systematic implementation.

This sums up the basics of risk management. If you understand these core concepts, you have what it takes to be a risk manager.