Incidental risks are those that occur naturally in the business but are not part of the core of the business. Inherent risks have a negative effect on the operating profit of the business. The experience of many people who rely on human services for support is that 'risk' is often used as a reason to prevent them from gaining further independence or fully accessing the community, and that these services are often unnecessarily risk averse. A high reliability organisation HRO is an organisation that has succeeded in avoiding catastrophes in an environment where normal accidents can be expected due to risk factors and complexity.
Most studies of HROs involve areas such as nuclear aircraft carriers, air traffic control, aerospace and nuclear power stations.
Organizations such as these share in common the ability to consistently operate safely in complex, interconnected environments where a single failure in one component could lead to catastrophe. Essentially, they are organisations which appear to operate 'in spite' of an enormous range of risks. Some of these industries manage risk in a highly quantified and enumerated way. These include the nuclear power and aircraft industries , where the possible failure of a complex series of engineered systems could result in highly undesirable outcomes. The total risk is then the sum of the individual class-risks; see below.
In the nuclear industry, consequence is often measured in terms of off-site radiological release, and this is often banded into five or six-decade-wide bands. Where these risks are low, they are normally considered to be "broadly acceptable". A higher level of risk typically up to 10 to times what is considered broadly acceptable has to be justified against the costs of reducing it further and the possible benefits that make it tolerable—these risks are described as "Tolerable if ALARP ", where ALARP stands for "as low as reasonably practicable".
Risks beyond this level are classified as "intolerable". The level of risk deemed broadly acceptable has been considered by regulatory bodies in various countries—an early attempt by UK government regulator and academic F. Farmer used the example of hill-walking and similar activities, which have definable risks that people appear to find acceptable. This resulted in the so-called Farmer Curve of acceptable probability of an event versus its consequence.
The technique as a whole is usually referred to as probabilistic risk assessment PRA or probabilistic safety assessment, PSA. See WASH for an example of this approach. In finance, risk is the chance that the return achieved on an investment will be different from that expected, and also takes into account the size of the difference.
This includes the possibility of losing some or all of the original investment. In a view advocated by Damodaran, risk includes not only " downside risk " but also "upside risk" returns that exceed expectations. Financial risk may be market-dependent, determined by numerous market factors, or operational, resulting from fraudulent behaviour e. Bernard Madoff.
A fundamental idea in finance is the relationship between risk and return see modern portfolio theory. The greater the potential return one might seek, the greater the risk that one generally assumes. A free market reflects this principle in the pricing of an instrument: strong demand for a safer instrument drives its price higher and its return correspondingly lower while weak demand for a riskier instrument drives its price lower and its potential return thereby higher.
For example, a US Treasury bond is considered to be one of the safest investments. In comparison to an investment or speculative grade corporate bond, US Treasury notes and bonds yield lower rates of return. The reason for this is that a corporation is more likely to default on debt than the US government. Because the risk of investing in a corporate bond is higher, investors are offered a correspondingly higher rate of return. A popular risk measure is Value-at-Risk VaR. The latter is used in measuring risk during the extreme market stress conditions.
Artzner et al. In Novak  "risk is a possibility of an undesirable event". In financial markets, one may need to measure credit risk , information timing and source risk, probability model risk, operational risk and legal risk if there are regulatory or civil actions taken as a result of " investor's regret ". With the advent of automation in financial markets, the concept of "real-time risk" has gained a lot of attention. Aldridge and Krawciw  define real-time risk as the probability of instantaneous or near-instantaneous loss, and can be due to flash crashes, other market crises, malicious activity by selected market participants and other events.
Regulators have taken notice of real-time risk as well. Basel III  requires real-time risk management framework for bank stability. Some people may be " risk seeking ", i. Such an individual willingly pays a premium to assume risk e. The financial audit risk model expresses the risk of an auditor providing an inappropriate opinion or material misstatement of a commercial entity's financial statements.source
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It can be analytically expressed as. Note: As defined, audit risk does not consider the impact of an auditor misstatement and so is stated as a simple probability. The impact of misstatement must be considered when determining an acceptable audit risk. Security risk management involves protection of assets from harm caused by deliberate acts.
A more detailed definition is: "A security risk is any event that could result in the compromise of organizational assets i.
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Compromise of organizational assets may adversely affect the enterprise, its business units and their clients. As such, consideration of security risk is a vital component of risk management.
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One of the growing areas of focus in risk management is the field of human factors where behavioural and organizational psychology underpin our understanding of risk based decision making. This field considers questions such as "how do we make risk based decisions? In decision theory , regret and anticipation of regret can play a significant part in decision-making, distinct from risk aversion   preferring the status quo in case one becomes worse off.
Framing  is a fundamental problem with all forms of risk assessment. In particular, because of bounded rationality our brains get overloaded, so we take mental shortcuts , the risk of extreme events is discounted because the probability is too low to evaluate intuitively.
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As an example, one of the leading causes of death is road accidents caused by drunk driving — partly because any given driver frames the problem by largely or totally ignoring the risk of a serious or fatal accident. For instance, an extremely disturbing event an attack by hijacking, or moral hazards may be ignored in analysis despite the fact it has occurred and has a nonzero probability.
Or, an event that everyone agrees is inevitable may be ruled out of analysis due to greed or an unwillingness to admit that it is believed to be inevitable. These human tendencies for error and wishful thinking often affect even the most rigorous applications of the scientific method and are a major concern of the philosophy of science. All decision-making under uncertainty must consider cognitive bias , cultural bias , and notational bias: No group of people assessing risk is immune to " groupthink ": acceptance of obviously wrong answers simply because it is socially painful to disagree, where there are conflicts of interest.
Framing involves other information that affects the outcome of a risky decision. The right prefrontal cortex has been shown to take a more global perspective  while greater left prefrontal activity relates to local or focal processing.
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From the Theory of Leaky Modules  McElroy and Seta proposed that they could predictably alter the framing effect by the selective manipulation of regional prefrontal activity with finger tapping or monaural listening. Rightward tapping or listening had the effect of narrowing attention such that the frame was ignored. This is a practical way of manipulating regional cortical activation to affect risky decisions, especially because directed tapping or listening is easily done. A growing area of research has been to examine various psychological aspects of risk taking.
Researchers typically run randomised experiments with a treatment and control group to ascertain the effect of different psychological factors that may be associated with risk taking. Thus, positive and negative feedback about past risk taking can affect future risk taking. In an experiment, people who were led to believe they are very competent at decision making saw more opportunities in a risky choice and took more risks, while those led to believe they were not very competent saw more threats and took fewer risks.
The concept of risk-based maintenance is an advanced form of Reliability centred maintenance. In case of chemical industries, apart from probability of failure, consequences of failure is also very important. Therefore, the selection of maintenance policies should be based on risk, instead of reliability. Risk-based maintenance methodology acts as a tool for maintenance planning and decision making to reduce the probability of failure and its consequences.
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