What is Risk?

The following thoughts were composed by Dr. Rick Nason, Principal of RSD Solutions LLC and Associate Professor of Finance at Dalhousie University in Canada.

For a brief time I was the Head of a new Risk Management Centre at Dalhousie University. While Director, I had an epiphany – everyone thinks that everything they do is about risk management! While I was not so naïve to think that the world was only concerned about financial risk (after all my background was in doing risk analysis of health effects of radiation and in a different vein the risk analysis of nuclear power plants), what I was surprised by was that virtually everything can in a broad sense be classified as risk management depending on what one’s personal (or corporate) definition of risk was.

For a long time I have used my definition of risk to be, “risk is the possibility that bad or good things may happen”. This definition encompasses three components: (1) an element of the future, (2) an element of uncertainty, and (3) a realization that risk has both an upside component as well as a downside component. For the purposes of financial risk management this has proven to be a very practical and workable definition of risk. The questions remains, is it sufficient for risk management purposes in a broader sense? What are the elements that the definition is lacking or limiting? What factors might be overlooked with this definition?

Take a minute and ask yourself – “what is your definition of risk?” Can you express it in a form that your colleagues and peers would understand? Would your friends or family members understand it? Would your definition extend to your dealings with family and friends? – Should it?

Risk is a popular area of best business practices – and rightly so. However if the field is to be truly useful, a practical and actionable definition is necessary. Is your company’s definition of risk up to the task? Is your personal definition of risk up to the task?