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The Spectrum of Knowledge

Question:

Discuss about the Risk Management Knowledge And Uncertainity.

We are always faced with decisions on a daily basis that people are generally have to make without any definite knowledge regarding the consequences. The quantity of knowledge that people have possess about the decision that have to be made substantially influence people’s final choice. If people analyze the spectrum of knowledge, it is observable two extremes exist: perfect knowledge and uncertainty. This then beckons the question where risk lies in such a wide spectrum. To address the above question, this article evaluate as well as discuss the meaning of the phrases knowledge, uncertainty and risk (Rose et al., 2017).

Upon having a clear understanding of such terms, the questions relating to the risk can be addressed in details. Thus, the statement “'Knowledge can be divided into uncertainty and perfect knowledge” and the question “Where does risk fit into this spectrum?” can addressed in the following subsections. The knowledge and understanding of risk and risk management forms the basis for considering where the risk fall for example, whether risk is the measurable component of uncertainty (Shortridge, Aven & Guikema, 2017).

The knowledge spectrum is divided between the two extremes of uncertainty and perfect knowledge. To understand risk and how risk differs from uncertainty, there is a need to understand the meaning of these phrases. The phrases risk and uncertainty are utilized interchangeably in daily conversation. This makes it quite challenging to understand their differences. Historically, even the economists have errored by mistaking risk for uncertainty and vice versa as they use these phrases loosely. For instance, Bastiat (1850) never made any sharp differences between the two phrases; risk and uncertainty. Referring to dictionary, it is observable that risk is defined as the likelihood of loss or injury whereas uncertainty is defined as something which is indeterminable or unknown beyond a doubt. Thus, with respect to daily usage, people will see that risk refers to the positive likelihood of a negative event from occurring whereas uncertainty does not actually means a value judgment. Nevertheless, both risk and uncertainty are comparable in nature and refer to a condition where people cannot fully foresee the future (Scholten & Fynes, 2017).


Analysis of risk on the basis of technology and economics, makes us see that risk is expressed a quantifiable value of an event being accompanied with the negative consequence. It is this measured as both the likelihood of the event happening and the gravity of the consequence. For instance, the likelihood of the bearing failing over a period of a 5 years is 0.001%. The consequence of the failing of such bearing will culminate in the engine to halt functioning. These two merge into a single value to indicate risk.

Correspondingly, in management , a risk linked to a decision shall be the likelihood that the outcomes shall be different from the people’s anticipation/expectation. Similarly, if people are planning something, the risk shall be different events which can occur, that shall lead to the project falling behind schedule or go over the anticipated cost.

Risk and Uncertainty: Understanding the Meanings

According to the study carried out by Knight (1921), risk is occurs when the upcoming events takes place with measurable likelihood whereas uncertainty happens when the likelihood of the upcoming events remains indeterminate or can never be calculated at all. This implies that with uncertainty, one cannot predict the future outcome while risk is measurable and indicates the likelihood of the future occurrence.         

From the above discussion, the distinction has been drawn between the unmeasurable uncertainty (uncertainty) and measurable uncertainty (risk). Risk, therefore, denotes the measurable component of uncertainty. Risk has been used in relation to measurable uncertainties or the likelihoods of insurance that provides certain validation for specifying the phrases as just indicated. Risk can, therefore, be designated by the term “objective” probability while uncertainty can be designated by the term “subjective” probability. 

There is a practical distinction between uncertainty and risk. The distinction is that in the earlier distribution of outcome in a cohort of instances is known (either via calculation a priori or from statistics of previous experience), whereas in the context of uncertainty, this is untrue, the motive being that it is intolerable to form a cohort of instances, since the context dealt with is in a great degree exclusive. The best instance of uncertainty is in relation to the exercise of judgment or the formation of such sentiments as to the forthcoming course of events, which views (and not scientific knowledge) really guide furthermost of the individuals’ behavior.

With known distribution of diverse possible outcomes in a cohort of instances, it is feasible to eliminate any material uncertainty by grouping convenient or instances consolidation. However, that it is feasible does not essentially imply that it shall be done, and individuals have to observe at the onset that where a distinct instance solely is at matter, there remains no distinction for conduct between a measurable risk alongside unmeasurable uncertainty (Walker, Davis, & Stevenson, 2017). As already observed, the individual throws his estimate of value of a given opinion into the likelihood form of “a success in b trials” (a/b) being the proper function) and “feels” toward it as toward any given other likelihood condition.    

Accordingly, it is worth concluding that risk is the measurable component of uncertainty. The statement “'Knowledge can be divided into uncertainty and perfect knowledge” is thus validated and the question “Where does risk fit into this spectrum?” is answered effectively.  

The focus of this task 2 is to present a working advice to Westpac Bank Corporation board on how they should approach risk. The board has adopted a Three Lines of Defense methodology to  management of risk that replicates its culture of ‘risk is everyone’s business’ whereby all staffs are accountable for the identification and  management of risk as well as operating with the anticipated risk profile of the Group. It is upon this basis that I will present a detailed advice on how the board should approach. The suggested approach that board should adopt is the risk-oriented decision making process.

The Nature of Risk

Step 1: Establishing the Decision Structure

The board needs to start by understanding and defining the decision which has to be made. This initial component of risk-based decision making is usually ignored and hence deserves additional attention by the board. The board has to perform the following steps to accomplish this essential component. (1a) the board must define the decisions by specifically describing what decisions have to be undertaken.

(1b) The board has to determine the needs to be engaged in decisions by identifying as well as soliciting involvement from key stakeholders. These stakeholders must be involved in decision making, and those to be affected by actions arising from the decision-making process. (1c) the board must identify the alternatives available to them. They have to describe the choices available to them.

This will assist them focus efforts solely on issues likely to influence the choice among credible options. (1d) the board has to identify the factors which shall influence decisions alongside risk factors. (1e) the board then needs to gather information regarding the factors which influence stakeholders. The board will perform particular analysis like risk assessment and cost studies for measuring the decision factors.

Step 2: Perform the Risk Assessment    

 Diverse types of risks are significant factors in several kinds of decisions. Simply put, risk the board must use risk assessment to understand: (i) what bad things can occur (ii) how likely the bad things to occur (iii) how severe the effects could be. The board needs to understand that the bad things of interest can be safety and health losses or property losses. Risk assessment will vary from extremely simple, personal judgment by persons to extremely complex assessment by experts.


The board has to choose the right approach to provide the required information without having to overwork the problem. The board will undertake the following steps: (2a) establishing the risk-associated questions which needs answers. The board will decide what questions, if correctly answered, would avail the risks insights required by them to make decisions. (2b) The board will than determine the risk-associated information required to answer the questions. They will then describe the information essential to answer individual question raised in the past step. The board will have to specify the following for each information: info type required, precision, certainty required besides analysis of resources available (Shortridge, Aven & Guikema, 2017)

(2c) The board will then select the risk analysis tools which will most effectively develop the needed risk-associated information. (2d) The board will then establish the scope for analysis tools. The board will set the relevant physical or analytical limitation for the analysis. (2e) The board will then generate risk-based information utilizing the analysis tools. The board will apply the selected risk analysis tools. This could need the use of multiple analysis tools and could engage certain iterative analysis. They should begin with a general, low-details analysis and advancing towards an increasingly specific, high-detail analysis (Schurr, De Tuya & Noll, 2017).

Step 3: Applying the results to risk management decision making   

Measuring Risk in Technology and Economics

The board should focus on lowering risk as possible. They may accept the risk at times and change the risk to be accepted. The board must take actions to manage risk to reduce risk. Such actions have to provide additional benefit than costs. They must be acceptable to stakeholders and avoid causing additional substantial risks.

The board must take the following steps: (3a) assessing the possible risk management alternatives and determining how the risks can be most effectively managed. The decision by board will include (1) accepting/rejecting risk or (2) finding particular ways of risk reduction. (3b) The board will use the risk-oriented information in making decision. This final decision-making phase usually engages substantial communication with a vast set of stakeholders.

Step 4: Monitoring Effectiveness via Impact Assessment

The board must use the impact assessment to track the effectiveness of the actions adopted to manage risk. This will help the board to verify that bank is getting the anticipated results from its risk management decisions. This will help the board to consider a new decision-making process in case the results are unexpected.

Step 5: Facilitating Risk Communication

The board will adopt a two-way process for communicating risk during the risk-based decision making. The board is encouraged to motivate stakeholders to do the following: (i) providing guidance on essential issues to consider. The stakeholders will identify particular significance issues to them. They will then present their respective views on how individual step of the process needs to be performed, or at minimum provide comments on plans others suggest (Stevenson, Savage & Taylor, 2017).

(ii) The board will also encourage stakeholders to provide appropriate information required for assessments. This is because some or all stakeholders could have essential information required in decision-making process. (iii) The board will also encourage stakeholders to provide buy-in for eventual decisions. Stakeholders need to agree on work to be undertaken in individual phase of the risk-oriented decision-making process. This will make the stakeholders to support the eventual decision (Hu, 2017).  

To assess the impacts of strategic risks, the bank should bring ERM into the frontline of strategic decisions making as well as execution. This will engage a precise comprehension of corporate strategy, the risks in espousing it as well as the risk of implementing it. With clear understanding of such risk, the bank will develop effective and integrated strategic risk mitigation (Hopkin, 2017). The bank will augment strategic management and get full value from the strategy by looking at sales growth and service delivery. It will be based on the much the bank is prepared to take to deliver its objective alongside timely as well as reliable evaluation of the much the risk is taking.

The assessment will match the impact to the decision framework. The risk will be characteristically assessed against schedule, cost and technical performance targets. It will also include compliance, oversight and political impacts. Garvey rating scales will be used to make multi-criteria assessments and ways to merge them into an entire measure of impact and consequence (Akyildiz & Mentes, 2017).

These scales will be used to determine risk impact levels crossways cost, performance, schedule, alongside additional criteria regarded significant to the project. The risk matrix tool will also help in evaluating the risk to special programs. Risk management tools for the bank and its components will assist with consistency of risk determination. It will help assess the risk against potential negative impact on goals of the bank.  

References

Akyildiz, H., & Mentes, A. (2017). An integrated risk assessment based on uncertainty analysis for cargo vessel safety. Safety science, 92, 34-43.

Hopkin, P. (2017). Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers.

Hu, W. (2017). Calibration of multivariate generalized hyperbolic distributions using the EM algorithm, with applications in risk management, portfolio optimization and portfolio credit risk.

Rose, A., Prager, F., Chen, Z., Chatterjee, S., Wei, D., Heatwole, N., & Warren, E. (2017). Uncertainty analysis. In Economic Consequence Analysis of Disasters (pp. 87-97). Springer Singapore.

Scholten, K., & Fynes, B. (2017). Risk and uncertainty management for sustainable supply chains. In Sustainable Supply Chains (pp. 413-436). Springer International Publishing.

Schurr, M., De Tuya, M., & Noll, K. (2017, January). Risk–Informed Decision Making in Information System Implementation Projects: Using Qualitative Assessment and Evaluation of Stakeholders’ Perceptions of Risk. In Proceedings of the 50th Hawaii International Conference on System Sciences.

Shortridge, J., Aven, T., & Guikema, S. (2017). Risk assessment under deep uncertainty: A methodological comparison. Reliability Engineering & System Safety, 159, 12-23.

Stevenson, M., Savage, B., & Taylor, B. J. (2017). Perception and communication of risk in decision making by persons with dementia. Dementia, 1471301217704119.

Walker, D. H., Davis, P. R., & Stevenson, A. (2017). Coping with uncertainty and ambiguity through team collaboration in infrastructure projects. International Journal of Project Management, 35(2), 180-190.

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