Chapter 2

Defining ERM

Security is mostly a superstition. It does not exist in nature, nor do the children of men as a whole experience it. Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure or nothing.

Helen Keller

Before we can even begin to define ERM, we must define risk. While risk is a very common term, it has several connotations. We need a very clear and specific understanding of risk itself, in terms of how we will use it in the context of ERM.

Definition of Risk

We will discuss the following three fundamental aspects of risk:

1. Risk is uncertainty.

2. Risk includes upside volatility.

3. Risk is deviation from expected.

Risk Is Uncertainty

A good way to think about risk is that it is present whenever there is less than 100 percent certainty that an event will occur precisely as expected. If that is our definition of risk, is there anything that does not involve risk? This may bring to mind the famous quote about uncertainty by Benjamin Franklin: “The only things certain in life are death and taxes.”

Other than these two eventualities, is there anything else in your life that does not involve risk? Interestingly, even death and taxes involve uncertainty, regarding the timing of the former and the exact amount of the latter. So, it may be that absolutely everything involves uncertainty.

Risk Includes Upside Volatility

When you think of the risks in your life, you probably think of negative events, such as losing your ...

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