What is Risk?

Risk ... to the Chinese, the symbol for Risk is the same as the symbol for Opportunity.

So, let's remember that not all risk is bad.

Risk is a combination of probability or a likelihood something happens and the impact of that event. In a way, that makes Risk measurable. Any "quant" can see that there is an application of some metrics available for risk measurement. And in many companies (like mine), a risk measurement is incorporated into how they identify and prioritize Risk.

For example, an event that has a high probability of occurrence (score it a 10) and a high impact (another 10) has a high "score" (10 X 10 = 100) and can easily sort to the top of the list of risks that need to be addressed by the company. There are also low probability, high impact events (like 9/11 as an extreme example) and high probability, low impact events (like stealing office supplies from the office).

There are also "risk takers" or the people who hook giant rubber bands on themselves (bungee cords) and then jump off bridges. Then there are those who won't leave their homes. There are also companies that are risk takers - companies that are on the cutting edge of technology, for example or that do a lot of R&D. There are also companies that take little risk - like a hospital - in fact, their mission is in direct opposition to taking risk because they are in the business of healing.

Now, I'm not advocating either position on the risk-taking spectrum. And I'm not on either extreme of the risk continuum myself. Rather, I'm somewhere in between and so is nearly everyone else ...

So if you are like me and don't favor bungee cords and like to come out of the house, weather permitting, the important thing to consider is your Risk Appetite.

Risk Appetite is a concept that considers your preference for risk-taking. Are you a person who likes consistency, routine ... are you a planner and a person who keeps detailed calendars and has a plan? If so, you are probably a person with little appetite for risk or your Risk Appetite is relatively low. If you are spontaneous, like adventure, and enjoy being on the "cutting edge", you probably have a relatively high appetite for Risk.

Now, there are no absolutes and in some cases you might like taking Risk. Maybe you like to travel to new, exotic places ... that might suggest some level of risk taking that is greater than the family who heads to the same Hilton Head Resort every year. But, that same exotic traveler might keep a detailed budget, planner, and has a routine job.

Why is understanding your Risk Appetite important?

You need to make risk decisions that are consistent with your Risk Appetite. Making decisions that are inconsistent with your Risk Appetite is what is keeping you up at night.

Trust me ... More to Come!

Post your questions, comments! Love to hear from you!