The Failure of Risk Management, 2nd Edition

CHAPTER 6An Ivory Tower of Babel: Fixing the Confusion about Risk

If you wish to converse with me, define your terms.

—VOLTAIRE

Concepts about risk and even the word risk are sources of considerable confusion even among those who specialize in the topic. There are a lot of well-entrenched and mutually exclusive ideas about risk and risk management, and if we are going to make any progress, we have to work out these differences.

You might think that agreement on what the word risk means should be relatively simple and, for that matter, should have been resolved long ago. If only that were the case. Multiple definitions have evolved in different professions. Some will not even know they are using it differently from others and may incorrectly believe they are clearly communicating with other risk professionals.

We need our vocabulary and concepts on firm footing before we can begin any heavy lifting with risk management. First, let's clear up some confusion about how the word risk is used in different fields. I offered a clear definition of risk in chapter 2, but it is worth restating here. While we're here, let's also clarify the related concept of uncertainty and distinguish between the qualitative and quantitative use of these terms. (Note that this is the same distinction I make in my earlier book, How to Measure Anything: Finding the Value of Intangibles in Business.)

UNCERTAINTY VERSUS RISK AND THE MEASUREMENTS OF EACH

• Uncertainty: The lack of complete certainty—that ...