What is Risk

Risk and controls

Risk is an inherent part of life, business, and decision-making. It involves the uncertainty of future events and the potential for undesirable outcomes. In other words, risk is the chance that something bad will happen. Whether you’re an individual, a business owner, or an investor, understanding and managing risk is crucial for success.

Key Components

For example, when you drive a car, there is a chance of an accident. The accident is the event. The accident, or event, can cause damage to your car, or harm to yourself. This is the impact. How fast you are willing to drive while considering the event is your risk tolerance.

Probability

The likelihood of an event occurring

 

Impact

The extent of potential harm or loss

 

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Risk Tolerance

Your willingness to take on challenges and uncertainties

 

How do you help mitigate the risk of an accident? You can lower the probability and/or the impact such as not driving faster than the speed limit, making sure your brakes are working properly, and wearing a seat belt. These are 3 risk mitigants.

Risk Mitigants

1. Drive at the speed limit
2. Check your brake pads
3. Wear your seatbelt

 

How can we monitor this risk? You can check your speedometer periodically to determine whether you are driving at the speed limit, or your key risk indicator.

Key Risk Indicator

1. Check your speed using the speedometer

 


Finally, take all this information to make a more informed decision. For example, if your brake pads are squealing, it probably means you need to change your pads. If it’s raining, you may adjust your speed depending on your risk tolerance.

Decision

Analyze and evaluate the risks, risk mitigants, and key risk indicators to make a more informed decision.