Risk ManagementUniversity of Economics, Kraków, 2012 Tomasz Aleksandrowicz
Risk in general• possibility of loss or injury – something could be lost / injuried by accident or misfortune• potential for a negative impact. – something could go wrong• likelihood of an undesirable event – some event may cause negative influence
Risk definition• probability that an actual return on an investment will be lower than the expected return (finance)• combination of the probability of an event and its consequences (RM Intiture)• uncertain future events that could influence the achievement of the organization’s, strategic, operational and financial objectives
Risk vs uncertainty• risk - variability that can be quantified in terms of probabilities• uncertainty - variability that cannot be quantified at all• In effect there is need for clarity of degree to which the results depend on statistically measurable risk and to which depend on factors that are entirely uncertain at the time of the analysis.
Main risk categories strategic / business risk financial risk • environment • market • political / regulatory • credit • competitors • liquidity • customers • reputation operational risk • people • process • technology • natural events
History of risk• In middle ages in Europe word ‘risicum’ used in context of sea trade• English word ‘risk’ comes from old French word risqué - “danger, in which there is an element of chance”• games of chance and hazard has been popular since accient times (as far as Egypt 3500 BC)• until the Renaissance that no “scientific” or statistical basis for gambling was presented – arabic numerc system 0-9 digits between X-XII, – treated as secret knowledge) 10
History of risk (II)• In XVI Girolamo Cardano (physician, gambler, and mathematician) wrote a book titled, Liber de Ludo Aleae (“Book on Games of Chance”) - first study of probability in games of that kind• Galileo Sopra le Scoperte dei Dadi (“On Playing Dice”) (1630)• In XVII basics of probability theory by Pierre de Fermat, Blaise Pascal and Christiaan Huygens• In XVIII basics of statistics theory developed by Pierre-Simon Laplace, Joseph Lagrange or Daniel Bernoulli• In XIX moder statistics thoery introduced (Carl Gauss and many others) 11
History of risk (III)• In XX modern probability theory by Andrey Nikolaevich Kolmogorov• In XX risk introduced into finance as first rating agencies emerged in US (i.e. Moody’s at 1906)• Scenario analysis matured during cold war• Scientific approach to risk in finance introduced in ‘60 (with CAPM model) and become popular in ‘80 (derivatives)• Frank Knight Risk, Uncertainty and Profit (1921)• Risk management as discipline 12