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First Principles – What is a risk?

One of the good things in writing a blog is that it is up to me to determine where I start.

In my teaching and other work, I use a concept called First Principles. A ‘First Principle’ may be seen as what is the essential element defining an area or question.

So, what is the first principle of risk management – what is a risk?

The financial downturn has had a number of people examining the failures of risk management. They have also talked about risk as an opportunity – I have heard many commentators speaking about the Chinese symbol for risk including both the symbols for danger and opportunity.

In an excellent book called ‘Against the Gods – The Remarkable Story of Risk’ by Peter Bernstein, risk is described in terms of its history and development.

Risk is an incredibly important concept in the management fields. The writings of Knight started the management literature but risk, as a subject, is extremely old. The modern conception of risk is rooted in the Hindu-Arabic numbering system which emerged over eight hundred years ago but the serious study of risk began in the Renaissance in 1654 with the work of Pascal.

For the people studying risk as an academic subject, the concept of risk within society has also been increasing analyzed, the work of Ulrich Beck (1992) and Anthony Giddens (1990) reflecting an increasing societal concern about risk and its management.

Risk was traditionally understood in terms of its role in ‘taming chance’ by quantifying and controlling uncertainty. The early management literature reflects this understanding of risk. Following the work of Knight and Keynes distinctions are made between risk – where probabilities are known – and uncertainty – where they are unknown.

So, in terms of a ‘First Principle’ understanding the balance between certainty and uncertainty we can better understand what the concept of risk is and how it can be managed.

Topics: what is risk risk risk management