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How does buying under risk differ from buying under uncertainty?


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Answered 2007-10-15 09:14:18

A risk is a compound estimation between an impact severity (if the risk concretizes) and the associated probability of occurrence (its uncertainty). As an example, the nuclear risk is composed of its impact severity (i.e. Tchernobyl) multiplied by its probability of occurrence (hopefully very low in the developped countries, where nuclear plants are operated under adequate security policies), thus the nuclear risk is judged acceptable. Compare this to the risk associated with a water dam, where the impact is much reduced compared to a nuclear accident (a single region overflooded instead of a whole continent), but with higher probability (much more water dams have broken in human history than nuclear plants). Other useful points to take into consideration: If the probability of occurrence associated to a risk is 0, this is not a risk anymore: it's a no-case. If, on the other side, the probability is 1, this is not a risk either. It's a problem that must immediately be dealt with as such, and not managed as a risk anymore. What can be done to directly reduce a risk ? There are essentially two axes of action:

- Reduce the impact's severity

- Reduce the probability of occurrence For exemple, in the maganament of fire risk inside a building, these two axes are envisioned:

- Put a fire detector in every room and firewalls between building aisles

(this clearly reduces the impact in case of fire, since the fire is detected earlier)

- Forbid smoking inside the building (this contributes clearly to the probability reduction, since it's a proven insurance fact that nine fires out of ten are due to improperly out-put butts) Besides these direct actions, there are also indirect ones, like for exemple having a rescue plan ready to reduce the number of victims in case the risk concretizes, and delegating (part of) the risk to a third party, typically by taking an insurance, but this has more to do with the side-effects than directly with the risk itself.

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