Thursday, August 2, 2012

What is Risk & Uncertainty in Risk Management

Definition of Risk & Uncertainty

Definition of Risk

Risk is the materializing of an adverse event resulting in financial and non-financial losses. Non-financial loss can be loss of reputation, suppliers, customer etc.

Risk has two components:

  • Impact (Hazard)
  • Probability

Impact (Hazard)

Impact or hazard is the expected loss in monetary terms that could result from risk if materialized. Monetary value of expected loss is often called as magnitude.

Probability

Probability is the likelihood that adverse event will occur. Risk having more probability can be assumed as occurring more frequently.

Definition of Uncertainty

Uncertainty is the event whose probability cannot be determined using mathematical formula.

In practice, risk and uncertainty is often used interchangeably.