Colloquially, we may talk of “taking a risk” when referring to such actions as starting a new business line or acquiring another company. But in context of risk management, risk means uncertainty surrounding a potential event. It is the possibility that something will happen—that is, an event will occur—with a negative outcome. The key here is possibility, meaning that an event might occur, not that something bad has already happened.

A while back I came across the writings of Peter Bernstein, editor of an economics and portfolio strategy newsletter, who brought forth an insightful perspective and simplicity to the topic of risk.

The Four-Letter Word Risk

Given all the mismanagement we've seen, Bernstein refers to risk as a “four-letter word,” and draws from Elroy Dimson of the London Business School in defining risk in the context of forecasts to mean that more things can happen than will happen.

Bernstein explains that we don't know what will happen, although we can devise probabilities of possible outcomes. But importantly, we will never know in advance the true range of outcomes we may face. In life, questions are posed: How will we deal with outcomes different from what we expect? What are the consequences of being wrong in our expectations? Risk means the chance of being wrong, of seeing outcomes different from what we expected. And key to that are the consequences of being wrong.

I would add that almost anything forecasted in a business context is going to be wrong. ...

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