CHAPTER TWO THE NATURE OF RISK

INTRODUCTION
Risk is endemic, it exists in different contexts and understood in a variety of ways. We speak of children being at risk or the risk of fire in a building or a bridge collapsing. If the many understandings of risk are studied it can be argued that the term can be viewed as being on a continuum of meaning ranging from the engineers view that risk can be measured using probability to the view that risk is danger which is culturally determined ( ol!heu, "##$%i. &he common factors that unite the many views as to the nature of risk are the fear of something going wrong together with conditions of uncertainty. In other words the downside of life. If we are to be able to manage risk its nature as viewed from different perspectives needs to be understood. In this chapter it is intended to review the nature of risk.

TOWARDS AN UNDERSTANDING OF RISK

Risk may be considered from a number of different standpoints that can be argued to form a continuum ranging from a very narrow view to a much broader understanding of the nature of risk. 't the narrow or (uantitative end of the scale is the view held mainly by engineers. &his approach takes the stance that risk is represented by the (uantitative measure of the probability of an untoward event occurring. Risk is distinguished from a ha!ard, this being a situation that increases the probability of an accident or other untoward event occurring. 's )ngineers have developed responsibility for safety in technology this understanding of risk is often used in the context of safety and is viewed

as the probability of failure. (*eck, "##+%ii ,egislators, in accepting the engineering view of risk in health and safety, refer to risk in health and safety statutes such as the Irish -afety, ealth and Welfare at Work 'ct "#.# and the )uropean directives relating to safety. In this paradigm the risk of an accident is assessed using a numerical approach whilst measures to reduce or prevent a loss occurring are aimed at ha!ards.

)conomists tend to view risk differently. 'gain probability theory is used but it is applied to all possible outcomes arising out of a particular event. *y multiplying the probability by the outcome an expected loss is produced. When all outcomes are multiplied by their respective probabilities a probability distribution is produced. /arious means are used to measure the outcome of an event. &he cost of the outcome in monetary terms may be used so that the expected loss will consist of the probability of all the outcomes times the costs that may arise. 0tility is often used instead of cost to take into account factors other than money. 0tility refers to the satisfaction obtained from an action or product, an example being the purchase of a good. &hus when applying utility theory to a problem economists calculate expected utility by multiplying the utility of the outcomes by the probability of its occurrence. &he outcomes are seen as a function of the event so that in order to obtain the expected value of the event all the utilities or losses are ascertained and multiplied by their respective probabilities to obtain the expected value. -imilarly decision theorists use a (uantitative approach by using the idea of an expected loss or gain or by using regret models. In these cases risk and opportunity go together. Risk arises out of the uncertainty of the future which can be measured and compared to

favourable outcomes. 1ealing with risk means collecting as much information as possible so that a rational decision can be made on how to deal with the unknown eventuality.

2inanciers also view risk from a different perspective. 'lthough they consider risk to be (uantifiable they tend to use the statistical concept of variance to measure risk. &he expected value from all possible outcomes from a particular situation is calculated, this being the mean, the risk arising out of this situation is then measured by calculating the average difference of each outcome from the mean, that is the variance. Risk is therefore the variability about the normal, it is the unexpected as compared to the average. 'ctuaries similarly consider risk from a (uantitative perspective. &hey calculate expected losses or gains from uncertain situations such as deaths within a population or gains that may be made from investments. &his profession deals with a risk from a mathematical base3 all reference to risk is purely from a (uantitative approach. &he engineers, economists and financiers assume that there is a rational approach to risk. &hey assume that individuals can foresee all possible untoward events as well as their outcomes. &he risk is the unwanted deviance from the expected norm measured in different ways.

't the other end of the scale is the idea that risk is a function of fairness considerations such as trust, liability distribution, and consent. Issues of probability are virtually excluded from this view (Rayner "##$%iii. ol!heu ("##$%iv and 1ouglas ("##4%v argue that risk is socially constructed. )ach society decides what is to be feared and what, if any, action is to be taken. Risk is considered to be danger, something that can go wrong. -ociety decides what it is that is dangerous. 'n example of society deciding what to fear

is the *-) crisis, which, despite arguments produced by the 05 government that there was nothing to be feared from eating *ritish beef based on 6scientific evidence7, led to a fall off in international demand for this product. -ocieties decided that there was a problem with *ritish beef and came to the conclusion that it was too risky to consume. &he fact that 6scientific evidence7 was produced was not sufficient to change their views.

If it can be argued that risk is socially constructed it follows that risk will be understood in different ways by various societies. ofstede ("#.8%vi supports this view by showing how organisations having different cultures react differently to uncertainty. &he perceptions held by different cultures is often ignored when considering the management of risk. It must be borne in mind that each society, whether it be a business, profession or country, has a different culture, this means that organisational culture is 9ust as important to take into account when considering risk as national culture. -ocieties decide what to fear and why (1ake : Wildavsky, "##8%vii therefore any attempt at managing risk must take this factor into account. -ocieties also set the level of risk that they are prepared to bear. &his can work negatively if a government is concerned about accidents. If society maintains a particular level of risk which it considers acceptable an attempt to reduce a particular risk in one way may lead to members of society attempting to compensate for the reduction by increasing the risk in other ways. 2or example efforts may be made by the legislature to reduce the risk of employees being in9ured by machinery by insisting that guards be placed over all moving parts. &his reduces the risk of in9ury. )mployees will initially use the guards but thus reduces the risk involved to a point lower than that they are prepared to take. 's a result there will be a desire to increase the risk and this

may be done by, for example, workers not using the guards or working at a faster rate. 'ccidents cannot be reduced or prevented without dealing with risk acceptability. Wilde ("##4% refers to this phenomena as risk homeostasisviii.

*eck is of the view that risk may be defined as a systematic way of dealing with ha!ards and insecurities induced and introduced by modernisation (*eck, "##+;+"%ix. 5nights : /urdubakis ("##$;<$8%x argue that risk has emerged as a conceptual vehicle for societal self=reflection, both at the global level of (late modern% society as a whole, and at the more local level of specific social problems. Risk tends to be understood in different ways conse(uently the term cannot be understood in isolation from the background, sets of constitutive practices or from the political and cultural debates within which they are embedded.

What does this mean for the idea that risk can be managed> 2irstly it must be accepted that risk is a concept viewed differently by different groups but despite this there is a commonality which can be assumed. Risk is seen as a result of the uncertainty of the future and of the possibility of something going wrong, but what that something is varies as does the intensity of the fear of that event from society to society. ?rganisations, especially those involved in business, would often see risk as the downside of opportunity. If an opportunity occurs there is a possibility of an event or events that could interfere with the fulfilment of the opportunity. &hus, in managing risk three (uestions need to be answered. What can go wrong> ow likely is it to go wrong> ow does the organisation see the world>

?ften a distinction has been made between the 6scientific view7 of risk and the perceptions held by 6non=scientists7. It is argued that the latter have a poor understanding of the nature of risk based on their assessment of dangers that could befall them. &hey perceive risk that is somehow different from the scientific understanding of risk. In fact there is no real difference, -cientists understand risk from their own perspective whilst 6non=scientists7 do the same. &he difference lies in their understanding, experiences, backgrounds and beliefs. &he idea of risk as viewed from the various standpoints can be distilled down to the idea that a risk is an unacceptable and unexpected outcome. What these are and how they are measured will vary based on a variety of factors. &he individual will have varying experiences colouring their view of what is to be feared and this will be enhanced by the social interaction that occurs in the activity where the risks occur. 'lso the wider society within the organisation, profession and nature will also affect how the individual defines what is acceptable. If risk management is to identify, evaluate and control risk they must be aware of the effect of various levels of social reality have on the understanding of risk and take this into account when setting about controlling risk.

RESPONSE TO RISK
@ow we have considered the meaning of risk we should consider the factors that affect an organisation or individuals response to risk. 'ccording to -itkin : Aablo ("##+%xi there are three clusters of factors that are involved in forming a response to risk. &hese are the characteristics of the individual, the characteristics of the organisational context and the characteristics of the problem. Bharacteristics of the individual include risk propensity,

risk preference and risk perception. Bharacteristics of the organisation include group composition3 cultural risk values3 leader risk orientation and control systems. &he problem characteristics are problem familiarity and problem framing (-itkin : Aablo, "##+;"+3 -itkin : Weingart ("##C%xii%

Individuals have different risk propensities. &hese range from risk averse, through risk neutral to risk seeking. -omeone who is risk averse attempts to avoid risky situations whilst individuals who are risk seeking look for these experiences. &hey might en9oy bungy=9umping or parachuting. Risk propensity will differ depending on the circumstances, someone who en9oys taking risks whilst parachuting may not be prepared to take part in motor racing. )conomists and decision theorists assume that individuals, in making decisions, are risk averse. &hat is they will take steps not to enter into risky situations. 1espite this assumption there is evidence to indicate that an individual may be risk seeking in one set of circumstances and risk avoiding in another (-itkin : Aablo, "##+%xiii. &his leads to the conclusion that attitudes towards risk depend on the situation.

Risk perceptions involve peopleDs beliefs, attitude 9udgements and feelings as well as the wider social or cultural values and dispositions that people adopt towards ha!ards and their benefits (Royal -ociety "##$; .#%xiv. ow people see risk is affected by a number of factors, including past experience and the control an individual or organisation may have over the particular event. 'ccording to ol!heu ("##$;+48%xv there are two levels to be distinguished here; the concrete level of risk perception on the part of those affected, and the theoretical level, on which the risk perception is conceptually structured and analysed.

Risk management will be involved in the theoretical level but will have to consider the view of those affected by the activity.

Individuals will be facing risk when dealing with a particular problem or activity. &he problem will be defined by its familiarity to the doer and how that problem is framed. &he activities surrounding the workplace are usually familiar to the employee and this can lead to an understanding of the risks involved as well as contempt for the dangers. When dealing with a problem it may be framed in different ways

THE MEANING OF RISK

&his discussion leads to the necessity to consider what we mean by risk in this text. In everyday language risk does not have a precise meaning but has a negative connotation. Eenerally it refers to imminent loss, damage or in9ury. &he level of risk is intuitively associated with the damage potential and the intensity of the threat ( ol!heu, "##$3xvi *ondi, "##Cxvii%. 1espite this reference is often made to the probability of an event occurring but in this case this generally refers to a sub9ective estimation of probability based on experience or other factors. It can be argued that a common understanding of risk refers to something that can go wrong or some deviation from the planned. It is the downside of a plan or strategy formulated by an organisation or individual. *usiness organisations will often see risk as the converse of opportunity. If an action is taken there is both a risk that a loss will occur and a likelihood of achieving a satisfactory outcome. Bonsideration will have to be given to whether there is sufficient opportunity to outweigh the possible risks or downside. )ach society, including

organisations, will have different opinions based on a variety of factors on what will be the downside risk.

'lthough different groups may have alternative views on the intensity of a risk the measurement of risk is useful in order to be able to prioritise actions to reduce risk but these measures will only be successful if they are acceptable to the organisation. &his means that in order to formulate a strategy the si!e of any risk which may arise will have to be measured. In order to implement any strategy consideration will have to be given to the culture of the organisation. Bulture can be considered to be way things are done in an organisation, the acceptable manner in which things are carried out or its values and beliefs. If a strategy for risk is to be implemented it must conform to the culture of the organisation. &his will mean that individuals within the organisation will have to agree on the risks which are being faced, the means of measurement and the way the risk is to be handled.

CLASSIFICATION OF RISK
In order to be able to identify risk a means of classification is necessary. In the risk management literature risk has been classified under a number of different headings. &hese classifications have generally been formulated in order to assist in deciding what action to be taken to manage risk, in particular whether a risk can be insured. &he most common classification has been to distinguish between pure and speculative risk. Aure risk is an event whose outcome does not lead to profit but only to loss. )xamples of pure risk are fires, burglaries and natural disasters. -peculative risk involves both profit and loss and would include betting on the horses or entering into business transactions. &his

categorisation was formulated by insuranceFrisk managers to assist them in distinguishing between insurable and uninsurable risks. In their view only pure risks could be insured and therefore were the sub9ect of risk management. (/aughan : /aughan;"##C%xviii. ' further classification is into static and dynamic risks. &he latter are events which are related to the economic situation whilst the former are occurrences which could happen regardless of the economic situation such as storms or earth(uakes. @either of these classifications are of assistance when identifying risk and they lead to a narrow classification of risk if identification of all risks is to take place.

When it comes to measuring risk and deciding what is acceptable difficulties have arisen. 2or example safety officials have referred to acceptable risk and tolerable risk. &he former is generally regarded by those who are exposed to the risk as not worth worrying about whilst the latter is a risk that society is prepared to live with in order to have certain benefits and in the confidence that the risk is being properly controlled (Elendon : Gc5enna, "##C%xix. What is acceptable risk has been a conundrum which engineers have been unable to solve. 'ttempts have been made to enumerate acceptable risk using probability. 0nfortunately this has not been accepted by the society to which it has been applied who do not generally accept the figures submitted as a meaningful means of measuring risk. 'n example of this is the reaction of the *ritish and )uropean publics to the fear that *-) in cattle can be transferred to humans referred to above.

&here are three general approaches to deciding what is acceptable risk. &he first is professional 9udgement implemented by codes of practice or 9udgement out of skill. &he

second is a form of analysis using mathematics and the third is by means of revealed preferences and base acceptability based on behaviour. 'gain this is not useful in identifying risk although may be a guide when considering evaluating the danger which could be caused by the existence of the risk.

In order to identify risk we need some structure that can assist the analyst to work through the problem. &o do this we must consider the types of risk that can occur. We have decided that risk involves the downside of life. If a family decides to venture to the beach for a picnic there is the risk of rain, which will spoil the familys en9oyment of the day, there is also the risk of a motor car accident. &hese risks affect the individual or group in their private activities. -imilarly an organisation or individual operating within the business environment will also face risks. Aroducts could fail to be sold on the market, or they could cause in9ury. @ot only that but the price of raw materials purchased from abroad could increase in price because of an unfavourable change in exchange rates. &hus in addition to private risks there are business risks to be faced. &his means that an organisation or individual can face both business risks in the business environment and personal risks in the private domain.

&hus the first classification is between business and personal risk. &he former adversely affects an organisation or individual operating a business in achieving its ob9ectives. &hese ob9ectives are diverse, for example an organisation may exist to make profit or to maximise returns to the shareholder or 9ust to survive. ?ften an organisations ob9ectives

will be unstated, despite this it is assumed that the organisation wishes to continue in some form.

&here are a number of dangers that could affect the continued existence of the organisation. In order to analyse these risks they can be further classified into societal, technological, economic, environmental or political risk (-&))A%. -ocietal risk involves the acceptance of the activities of an organisation by society. 2or example the pollution of local waterways by farmers and factories may be unacceptable to society and produce a reaction that could affect the operation of a business. 'nother example of an activity unacceptable to society is cloning of human beings or the consumption of genetically modified vegetables. Briminal activities can also be argued to be societal risks in that they are not acceptable to society as a whole and can lead to losses. &echnological risk involves the possibility that a particular technology does not fulfil its function as happened in the case of thalidomide. 'nother aspect of technology risk would be the fear that a particular technology such as genetic modification could cause harm. &his could also lead to losses. )conomic risks involve the possibility of an economic down turn, inflation or unemployment. )nvironmental risks involve the possibility of earth(uakes or storms causing severe damage whilst political risk is a change in legislation, trades sanctions or war.

&hese risks can be further sub=divided by considering the ob9ects that may be affected by the operation of a danger. &hese can be listed as damage to property, personnel, financial or liability. Aroperty risk involves damage to fixed or moveable property. &his includes

buildings, furniture or your personal 9ewellery. Aersonnel risk involves death or personal in9ury to individuals or a decrease in their health or welfare. &his will also include an attack on their personal integrity such as libel or slander. 2inancial risk concerns monetary matters such as an unfavourable change in the price of shares on the stock market affecting the value of the company or the assets being held by the organisation or a drop in profits. ,iability risk follows on loss or damage to one of the aforementioned ob9ects. If property owners perceive that their goods have been destroyed or damaged by the wrongful act of another person or as a result of a breach of the law the in9ured party may decide to pursue an action against the person causing the loss. -imilarly in the case of an individuals personal integrity being breached a legal action may follow. &hus liability risk is the risk of being sued following an event that could cause damage to one of the other factors, i.e. property, personnel, or finances. If the loss arises from a breach of the law damages are payable by the tortfeasor. &his classification of risk can be applied both to organisations and individuals and be used as a basis on which to consider risks faced by both. &hus consideration will be given to whether business or personal risk is being considered and then a -&))A analysis carried out on property, personnel and finances to see whether they will be affected and the consideration given to liability risk. CONCLUSION &he above discussion shows that risk can be viewed from a variety of different perspectives. In managing risk this will have to be taken into account. In the past the management of risk has generally been divided between various specialists such as health and safety, financial risk management and business risk but if risk is to be managed efficiently all classifications of risk should be considered.

Risk can be accepted as measurable in certain circumstances but it must be borne in mind that societies decide what is dangerous and what is acceptable. &he analysis and acceptability of a risk cannot be imposed on an organisation or society without involving those members who are directly involved with the risk. In this context risk is socially constructed. &hroughout this work it is intended to bear in mind that there are many types of which need to be considered by both the individual and the organisation. In this work it is intended to concentrate on the corporate risk. &here are risks to be faced but throughout the process of managing risk the fact that the organisation and the wider society will decide what to fear will have to be borne in mind. In particular consideration will have to be given to the culture of the organisation if it is intended to try to reduce losses arising out of unforeseen events.

@ow that the nature of risk has been discussed it is intended to consider the discipline of risk management on the basis that risk is the likelihood of the occurrence of an event which could adversely affect the attainment of the ob9ectives of an organisation. &hese risks may be viewed differently by members of the organisations and this will have to be taken into account during the risk management process. &he culture of an organisation is an important consideration in managing risk, as this will govern a firms attitudes towards risk. Bonse(uently the approach to the identification and measurement of risk must take into account societies views.

i ol!heu, 2. "##$. Institutionali!ed risk perception; an economic perspective. In; Risk is a construct, ed. by *ayerische Ruck. Gunich; 5nesebeck Emb , pp +48 = +H< ii *eck, 0. "##+. Risk Society. ,ondon; -age Aublications iii Rayner, -. "##$. Risk perception, technology acceptance, and institutional culture; case studies of some new definitions. In;Risk is a construct. )dited by *ayerische Ruck. Gunich; 5nesebeck Emb : Bo iv ol!heu, 2. "##$. Institutionali!ed risk perception; an economic perspective. In; Risk is a construct, ed. by *ayerische Ruck. Gunich; 5nesebeck Emb , pp +48 = +H< v 1ouglas, G. "##4. Risk and blame. ,ondon3 Routledge vi ofstede, E. "#.8. Cultures consequences. ,ondon; -age Aublications vii 1ake, 5. : Wildavsky, '. "##". Individual differences in risk perception and risk=taking preferences. In; The analysis, communication and perception of risk. )dited by Earrick. *.I. and Eekler, W.B.. @ew Jork; Alenum Aress. viii Wilde, E.I.-. "##4. Target risk. &oronto; A1) Aublications ,td. ix Ibid. x 5nights, 1. : /urdubakis, &. "##$. Balculations of risk; towards an understanding of insurance as a moral and political technology. Accounting organizations and society. /ol."., @o. <F., pp. <+#= <H4 xi -itkin, -.*. and Aablo, '.,. "##+. Reconceptuali!ing the determinants of risk behaviour. Academy of Management re ie!, /ol."<, no.", pp. #=$. xii -itkin, -.*. and Weingart, ,.R. "##C. 1eterminants of risky decision=making behaviour; a test of the mediating role of risk perception and propensity. Academy of Management "ournal, vol.$., no.H, pp. "C<$="C#+ xiii Ibid xiv Royal -ociety Report on risk and safety. "##$; ,ondon

xv Ibid xvi Ibid xvii *ondi, . "#.C. Risk in perspective. In; Risk man#made hazards to man. )dited by Booper, G.E. ?xford; Blarendon Aress xviii /aughan and /aughan. "##C. Risk management and insurance. @ew Jork; Wiley xix Elendon, '.I., : Gc5enna, ).2. "##C. $uman safety and risk management. ,ondon; Bhapman : all