Chapter 5

Question 1

5.1: How are risk and uncertainty linked?

Answer 1

The terms risk and uncertainty are often used interchangeably. Both describe a situation where a decision or action may
result in two or more outcomes.
The term risk is generally used where it is possible to assign probability and impact values to these outcomes.

Uncertainty arises where there is no data to allow the estimation of probability and impact.

In reality, there are very few situations within an organisational context where the probabilities and impacts of the outcomes associated with risky activities or decisions are known with complete confidence. This does not mean that there is only uncertainty, but there are degrees of uncertainty. The concept of the confidence interval allows us to express the degree of uncertainty

Question 2

5.2: Provide three examples of pure risk and three examples of speculative risk in organisations

Answer 2

Pure risk: Injury at work
Speculative: research and development

Pure: pollution of any kind
Speculative: mergers and acquisitions

Pure: production of faulty products
Speculative: major change projects, such as implementing a new IT system

Pure: Fires, floods and so on
Speculative: Fluctuations in consumer demand

Pure: IT systems failure
Speculative: economic cycle (boom or bust)

You will notice that the pure risk examples tend to be much more specific than the speculative ones. This is because it is usually necessary to frame risks in a restrictive way in order to create pure risks. The risk of injury is part of the wider
operational processes of an organisation and these processes may result in both positive and negative outcomes. Some of these negative outcomes could be worker injuries.

Question 3

5.3: What is the purpose of classifying risks using the common categorisation approach?

Answer 3

Categorising risk helps an organisation to understand the range of risks to which it may be exposed. It also supports the
management of risk: different types of risk may require different management approaches.

Question 4

5.4: What risk-perception factors may cause decision-makers to underestimate the level of risk? (4)

Answer 4

The following risk perceptions may cause risks to be overestimated:
* voluntarily choosing to take a risk;
* feeling in control of a risk activity (such as driving);
* being familiar with a risk because it has been taken before; and
* the ultimate outcome associated with taking a risk is a long way in the future (smoking risks, for example).