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Risky Business (and Physics, Sociology, Biology...)
Topic: Risk
by Aidan, 2019 Cohort
Human understanding of risk has developed over time and is now incorporated within many academic fields. This summary provides a general definition and explanation of risk before briefly exploring its application to unravelling complex problems.
What is risk?#
Many disciplines have different definitions of risk. In short, risk is the possibility of loss. Depending on the discipline, risk may not be equivalent to uncertainty or variation. Risk generally relates to negative outcomes. For example, a person does not usually ask “what is the risk of winning the lottery?”. In addition to the possibility of incurring a loss, we must also consider the size of the potential loss when determining risk.
Why is an understanding of risk important?#
It may be difficult to precisely explain why risk is important in your life. We may take it for granted that we no longer think of risk as unmanageable or out-of-our-control. A modern understanding of risk allows us to undertake a rational process of risk. Rather than fear lightning as being caused by angry gods, understanding risk allows us to determine the likelihood of being struck by lightning and decide whether it is worthwhile to stand outside in a thunderstorm (and for how long we should stand there). Alternatively, we could minimise the risk by not standing in the thunderstorm at all.
How can understanding risk assist in unravelling complex problems?#
Calculating risk helps humans make informed decisions. We can use our findings to determine the diversification of a financial portfolio, the expected damage from a structure failure or the spread of disease. After attempting to quantify the risk, this may then change how we approach a complex problem. Maybe our current solution is too risky for the needs of the project and we need to minimise the risk? Alternatively, it could be impossible to eliminate the risk, requiring us to scrap the project or tolerate the risk and create a risk-management plan.
In some circumstances, we may only be able to identify risk through intuition and experience, such as when determining if rock-climbing is risky. Humanities regularly deal with this type of risk and characterise it using established criteria. This method is susceptible to a variety of biases but quantification of risk possesses its own disadvantages ? an example being where underlying issues in the method of calculating risk contributed to a financial crisis (see Global Financial Crisis reading below).
Points to takeaway#
- Risk generally involves considering:
- the possibility of a negative outcome occurring; and
- the size of the potential resulting loss.
- Our understanding of risk is a rational concept that helps us to make informed decisions.
- Perceived risk changes how we approach and manage a complex problem.
“You want a valve that doesn?t leak and you try everything possible to develop one. But the real world provides you with a leaky valve. You have to determine how much leaking you can tolerate.”
- Arthur Rudolph, Developer of the Saturn 5 rocket used for the Moon
Explore this topic further#
- Risk{.link-ext target=”_blank” } (Wikipedia)
- Chapter 26, Coping and Managing under Uncertainty PDF{.link-ext target=”_blank”}
- Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein
Return to
Risk in the Primer
Disclaimer#
This content has been contributed by a student as part of a learning activity.
If there are inaccuracies, or opportunities for significant improvement on this topic, feedback is welcome on how to improve the resource.
You can improve articles on this topic as a student in "Unravelling Complexity", or by including the amendments in an email to: Chris.Browne@anu.edu.au
Human understanding of risk has developed over time and is now incorporated within many academic fields. This summary provides a general definition and explanation of risk before briefly exploring its application to unravelling complex problems.
What is risk?#
Many disciplines have different definitions of risk. In short, risk is the possibility of loss. Depending on the discipline, risk may not be equivalent to uncertainty or variation. Risk generally relates to negative outcomes. For example, a person does not usually ask “what is the risk of winning the lottery?”. In addition to the possibility of incurring a loss, we must also consider the size of the potential loss when determining risk.
Why is an understanding of risk important?#
It may be difficult to precisely explain why risk is important in your life. We may take it for granted that we no longer think of risk as unmanageable or out-of-our-control. A modern understanding of risk allows us to undertake a rational process of risk. Rather than fear lightning as being caused by angry gods, understanding risk allows us to determine the likelihood of being struck by lightning and decide whether it is worthwhile to stand outside in a thunderstorm (and for how long we should stand there). Alternatively, we could minimise the risk by not standing in the thunderstorm at all.
How can understanding risk assist in unravelling complex problems?#
Calculating risk helps humans make informed decisions. We can use our findings to determine the diversification of a financial portfolio, the expected damage from a structure failure or the spread of disease. After attempting to quantify the risk, this may then change how we approach a complex problem. Maybe our current solution is too risky for the needs of the project and we need to minimise the risk? Alternatively, it could be impossible to eliminate the risk, requiring us to scrap the project or tolerate the risk and create a risk-management plan.
In some circumstances, we may only be able to identify risk through intuition and experience, such as when determining if rock-climbing is risky. Humanities regularly deal with this type of risk and characterise it using established criteria. This method is susceptible to a variety of biases but quantification of risk possesses its own disadvantages ? an example being where underlying issues in the method of calculating risk contributed to a financial crisis (see Global Financial Crisis reading below).
Points to takeaway#
- Risk generally involves considering:
- the possibility of a negative outcome occurring; and
- the size of the potential resulting loss.
- Our understanding of risk is a rational concept that helps us to make informed decisions.
- Perceived risk changes how we approach and manage a complex problem.
“You want a valve that doesn?t leak and you try everything possible to develop one. But the real world provides you with a leaky valve. You have to determine how much leaking you can tolerate.”
- Arthur Rudolph, Developer of the Saturn 5 rocket used for the Moon