TABLE OF CONTENTS Risk is a much misunderstood and sometimes misused word. This is not surprising; in its common usage in English, it can also mean chance or gamble. In insurance and financial circles, the word describes an asset, a person or financial instrument. The meaning of the word can therefore change with the context, and with the background of the people using the word.
In this chapter we will examine risk in its sense of loss of life, property or production capability. Whether we realize it or not, we make decisions based on our evaluation of the risks. It is therefore useful to examine and understand the facets of risk and we will cover the following:
Our perception of risk affects the way we make decisions, so it will be useful to understand the relevant issues;
In a quantitative sense, risk has two distinct elements: the probability or frequency and the consequence or severity of the event;
The exposure or demand rate affects the required performance level. If one can reduce the demand rate, one can lower the acceptance standards without affecting the level of risk.
The dictionary definition of risk is
Risk: the possibility of incurring misfortune or loss...danger, gamble, peril, hazard.
To take a risk: to proceed...without regard to the possibility of danger....
Collins Dictionary and Thesaurus, Harper Collins Publishers
Note that the stress is on the possibility of occurrence of events. In day-to-day use, the term risk is used in the sense...
