Risk, Uncertainty, Surprises

 

*/By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc./*


In our overly regimented, legalistic and regulated world, we tend to become
overly fond of and dependent on labels.  This is not entirely inappropriate
as labels convey meaning, both explicitly and implicitly.  Different words,
meaning the same thing can convey very different meanings depending on the
context, the speaker and especially the reader / listener.

In risk management two words or labels arise again and again; risk and
uncertainty.  Often they are used interchangeably.  Amongst the more highly
educated (but not necessarily the more intelligent) the words are carefully
segregated with risk being those events that can be assigned a given
probability distribution while uncertainty is strictly reserved for events
that cannot be characterized by a probability distribution.  This
distinction however generally only leads to discussions that border on the
purely philosophical about measurement theories.

Perhaps it is time to add a third label to the risk lexicon, namely
surprises.   Perhaps risk management should become surprise management, and
Chief Risk Officers should become Chief Surprise Officers.  Admit it –
this simple change of words totally and instantaneously changed your view of
risk management didn't it?  In fact, it probably brought on a chuckle and
a thought such as "we already are the department of surprise
management". 

Now that you have had your laugh, is it really that silly or farcical of an
idea?  It gets rid of the practical false dichotomy between the words risk
and uncertainty. (I will admit that the mathematical dichotomy is real and
useful.)  However it would also change how everyone thinks about risk
management – and that change just might be more practical, efficient and
better in the long run.  Take the idea up with your CSO.