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Archive for July, 2015|Monthly archive page

A Simple understanding of Complex Risk

In Banking, Insurance, Risk Management on July 5, 2015 at 5:43 pm

Many of us in our daily life struggle with understanding of risks.  A well-known risk among our community is easily understood by all of us because potential negative consequences are obvious to us.  We also support that the risk which have potential low uncertainty, can be called simple risks. There is hardly any issues in understanding such kind of risk. For example construction of a road, driving a motor vehicle. Also for these risk statistics for long timeframe is available such as some accident in last 50 years in particular region. Based on this understanding, we can drive conclusions very easily such as State A is more accident prone than B. But what if risk is not simple, it is rather complex.

A complex risk is commonly understood as the risk which is not simple risk. Think if same risk is understood differently by many people who lead to many interpretation. It may be called situation of ambiguity where no conclusion can be drawn. Will you call it simple risk? Professor Otwin Renn defined ambiguity arise when there is an existence of multiple values. So, if a same building is inspected by three engineers and all of them provided different risk ranking such as low risk, medium risk and high risk. How conclusions can be drawn about the risk profile of the building. It can be said that there is difficulty in understanding the risk of this particular building.

Another situation where a single risk may affect a large population. It generally comes to the mind that it may be some natural disaster such earthquake or flood. What if two different risks occur separately such as default of securities and natural disaster but with no interaction. The effects will be severe in each case. If interaction between two or more risk affects the large society and risk is embedded for long time so it is difficult to find how risk originates and who is responsible for this. This is certainly called a complex risk with ambiguity. Such type of risk is known as Systemic risk (don’t get confused with Systematic risk).  

Systemic risk does not confined to a particular state or region but it may accelerate across national boundaries and may result in crisis. Its analysis is dependent upon the interdependencies among risks in holistic manner and Ripple and Spill over effects. Can anybody outsider/stranger attempt to understand the risk within organisation, houses or societies? Is there any short cut to understanding of risks? It is difficult to answer because it requires deeper understanding of risk which requires time and flexibility.  A risk in-house A to F could be different than Risk of house G to N as “Not all risks are equal”stated by Dutch Health Council, 1995

Therefore, there is a greater need to understand our own risk, risks where we work and in our societies. A deeper understanding of risk can untangle the complex bunch of interconnected risks and simplify our problems. 

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