The biggest constraint in risk management, indeed the very reason for the existence of the discipline, is our inability to foresee what will happen next.
In most cases where people have to manage the risk of an event, it is very common to rely on subjective estimates of the likelihood that the event will happen. It may be easy to deliver criticism of this approach, but alternative options are limited.
An improvement over such a simplistic 'gut feel' approach is to incorporate the phenomenon that events of a smaller scale occur at a higher frequency than similar events of bigger scale. Earthquakes of low magnitude occur very frequently. Killer earthquakes occur far less frequently.
The relationship of the frequency between the two types of events is described a the Power Law Distribution. If we keep track of smaller scale events, we will be able to predict with a certain degree of confidence the frequency of the bigger scale events.
***
No comments:
Post a Comment