Risk

Risk refers to the possibility of adverse outcomes resulting from uncertainty about future events. It is often quantified as the probability of a loss or other unfavorable result, multiplied by the severity of that result. In economics and finance, risk is distinguished from certainty and is frequently modeled with probability distributions. The distinction between risk and true uncertainty was described by Frank Knight, who defined risk as measurable probabilities rather than unknown odds.

Risk is commonly conceptualized as a function of hazard, exposure, and vulnerability. The risk of harm rises with more severe hazards, greater exposure, or higher vulnerability. Common risk categories include financial risks (market, credit, liquidity), operational risks (process failures, IT outages), strategic risks (business-model shifts), regulatory and legal risk, reputational risk, and environmental or physical risks (disasters).

Assessment and measurement involve identifying risks, evaluating their likelihood and impact, and prioritizing responses. Methods include qualitative scoring, scenario analysis, and probabilistic techniques such as Monte Carlo simulation. In finance, metrics like value at risk (VaR) and expected shortfall estimate potential losses under specified conditions.

Risk management aims to align risk with organizational objectives. Frameworks such as ISO 31000 provide principles for governance and continuous improvement. Core steps include defining risk appetite and tolerance, identifying risks, assessing probability and consequence, implementing controls, transferring risk via insurance or hedging, avoiding or reducing risk, and planning contingencies.

Applications span corporate governance, project management, engineering, public health, climate adaptation, and disaster readiness, reflecting risk management’s role in decision making under uncertainty.