Categorizing Risks for Risk Ranking by Morgan - Essay Example

?Introduction This report is based upon the article Categorizing Risks for Risk Ranking by Morgan et al., this article examines the growing interest of organisations to risk categorisation approach from rule based approach. The shift in risk management approach is due to its effectiveness in mitigating risks effectively. The article is mainly based upon management sciences perspective to risk management and provide different approaches to underlying literature for categorisation. Summary Importance of Risk Categorisation and Risk Ranking Risk categorisation and risk ranking are tools of risk management which are required to evade unpleasant consequences. (CROUHY, et al., 2000) Risk categories provide a systematic and planned approach in identifying risks and mitigating them. Risk categorisation enhances range of risk identification leading to effective assessment (VAUGHAN, 1997), management and analysis process by which one can easily understand the nature of risks. It is almost impossible to develop one yard stick that fits for all the risks therefore, risk categorisation helps in arranging these risks in accordance to sources, area and effects of risk etc. Risk categorisation can also be based upon financial, regulatory compliance, safety, technology, security, environmental, strategic and stakeholder risks etc. (HAMPTON, 2009). So, dividing risks into categories provide adaptable cluster of risks that can be mitigated easily (GREGORIOU, 2007). When risk are categorised, it ensures filtering risks accurately as problems of double counting, fear inclusion of one risks or exclusion of another does not remain a concern anymore. Secondly when it comes to assigning scores to risks, categorised risks are easy to be scored as compared to uncategorised risks (AVEN, 2012). Risk categorisation is important is significantly important for assessing, ranking, managing, processing and mitigating risks (SMITH, 2005). Alternative Approaches to Categorisation The authors of this article presented three approaches and methods for categorization of risks which can be encompassed into three fields of literature (HUSSEY & HALL, 2008). First field of literature described by authors is psychological approach to categorise risks which is further subdivided into three approaches. In this approach it is assumed that risk is the subjective judgement of people (AVEN, 2008). Value judgement provides extensive analysis of risks yet can also be fatal if predicted immaturely (ISHIKAWA & TSUJIMOTO, 2009). One risk may not be important to second person as it is for the first person. Psychological approach further offer alternative subdivision as categorisation on basis of similarity (KIEV, 2002). Similarity risk categories help defining social and cognitional order of exploded population on which opinions are constructed and divided (SCHNEEWEIS, et al., 2010). Next alternative approach of risk categorisation is explanation based approach, in which based on understanding and relation between events, risks are arranged and categorised. After psychological approach, an alternative approach of Natural Sciences is prescribed which categorises risks considering the common characteristics of risks. Natural Sciences literature is defined through monothetic and polythetic classification (MOLAK, 1997). Whereas monothetic classification of risks comprise only specific risks that are sufficient enough to identify and explain the risk. On the other hand, polythetic classification of risks is a broad concept of arranging risks (Sutcliffe, 1994). Another proposed alternative approach is environmental psychological categorisation with subdivision of essentialist and constructivist perspective. Essentialist perspective requires similar features as necessary attribute to categorise risks whereas constructivist perspective supports adaptability and encourage categorisation designed upon stimuli presented at time to identify risks. Recommendations for Categorisation Authors have recommended to use an explanation based approach in which risk are categorised at the initial stage considering relationship, goals and understanding of events and their associated risks of the organization (AVEN & RENN, 2010). In comparison to all approaches explanation based approach does not imply rigid rules and allow sorting risks after extensive literature and situational preview. Explanation based approach proposition allow categorisation at very initial stage but still it requires some cautions to be taken (POITRAS, 2002). Authors further recommended to subdivide categories if necessary because subdivision leads to precision and in turn precision helps in effective management and categorisation of risks. Beside precision it is also recommended to use consistent categories which are related to desired attributes. Critique of Risk Categorisation Authors of the journal under study have extensive experience of risk research. Most of their concern has been on impact of risk on human behaviour and on psychological aspects of risk. Since risk ranking is more volatile and unpredictable in sustaining growth; hence risk categorisation may serve the purpose of managing risks effectively. This assumption has compelled authors to evaluate efficiency of risk categorisation for risk ranking. Redefining Risks Authors defined risk as multi attribute concept which has many dimensions and as explained earlier that one cannot gauge risk with one yard stick. The paper assumes that risks are not given but they are redefined and are redefined individually according to the situation and relativity. Risks are not certain so, when it comes of categorising them, every organisation chooses its own certain criteria (LOCH, et al., 2006). Redefining risks is not only confined to organisations but investors, stakeholders and countries also timely redefine their risks and categorise them but they are not given. In recent scenario an example can be quoted from Eurozone where European regulators have asked financial banks to extend their capital reserves up to 9% due to the increasing hike of Eurozone debt crisis which has not only threatened Eurozone but individual countries and currencies are also at the verge of the risk (Satter, 2013). In this regard many banks have responded back to caution and have redefined and reclassified their risks. In most of the organisations risk redefining is legal and is used to cope with uncertainty and ambiguity. Authors also stated that risk has different meanings to different people, some define it according to their beliefs and knowledge, and some define it through cognitive stimulus while some define risk according to their culture. This imply that risks have multi dimensions and understanding to different individuals so, risks are not given but every individual redefine its own risk. Ranking Actions Ranking actions are very important because they provide basis for effective management. Paper suggest that by ranking actions organisations get to know the proposed solutions to manage uncertainty. The aim of risk ranking is eliminate hazards and reduce level of risks which enhances precautionary umbrella of firms. By ranking risks organisations can successfully create a safe and secure working environment. Paper discussed that categorising risks helps in managing risks and if this management is reflected in policy making; firms can easily come up with effective policy tools to mitigate risks. Ranking actions also provide assistance in optimizing decisions and with limited resources, ranking actions can be very operative and meaningful (FISCHHOFF, 2011). The study signifies the importance of ranking actions that in order to mitigate one severe risk, there are chances of overcoming other low potential risks too. So, ranking actions as opposed to ranking risks is helpful in policy making. Problems with Risk Categorisation No doubt risk categorisation makes risks manageable with greater possibility and effectiveness because managing hundreds of risk without classification will be difficult. Risk categorising the risk register provides ease to managers in understanding, identifying and eradicating risks. Though risk categorisation creates ease to the organisations and managers but it certainly has some drawbacks too. Risk categorisation align risks into one categories and helps avoiding double counting but in certain cases a risk might fit into more than one class (Peter & Erik, 2003). Assuming effect of risk for one factor may produce spurious results since risks are correlated to another category. Fitness of one risk into multiple categories creates problem in decision making where to put risk and ultimately lead to bad choice. For instance managing competent staff can be an organisational risk as well as the competency risk too. In this regard it is possible that managers miss some risks and their consequence considering its involvement in another category. Another problem with risk categorisation can be if a risk does not fit any of the category. One could design individual category for every risk that would still be problematic because using individual categories for every project will be confusing too. So, risk categorisation has certain flaws too which can be challenging to managers and to organisations. As a result incomplete action plan and castling for wrong risks will cause wastage of time and money besides the risks still remain unattended and may lead organisations to deep crisis. Management Sciences Authors stated a management process to mitigate risks in which organisations at first identify risks, analyse the severity and potential of risk (ELLIOTT, et al., 2002). Based on risk rankings organisation devise an action plan to mitigate these risks. Once the strategy is devised and risks are categorised, policy tools and policy measure are designed which are consistently monitored and implemented for best results. Finally in the management process firms happen to control and neutralize the risks. Using a risk management process for mitigating risks imply that study is mainly written from management sciences point of view rather from risk listing perspective. In contrast to this paper the risk management process of corporations and organisations is a bit different. Corporations usually adapt certain rules and principles for managing risks, these rules usually are the primary tool for containing and eliminating risks. It is astonishing to know that these basic rules have be successful to eradicate risks but not all type of risks can be dealt with the primary risk management process (ERM INITIATIVE FACULTY; ALEX JANDRISEVITS, 2013). This paper provides an advance technique of risk management through risk categorisation which works beyond the basic rule based processes. So, Risk management technique used by corporations and organisations is somewhat different than the approach discussed in this article. Conclusion The risks associated with organisations are not homogenous and require different treatment according to the risk pattern and cannot be addressed with only one yard stick. Organisation need to understand measures according to their priorities and categories them consequently. There are some drawbacks allied to categorisation but through sub categorisation and by creating new related categories, those problems can be addressed. So, risk categorisation for risk ranking is about value choices which is an effective technique for risk management beyond rule based approach. References AVEN, T., 2008. Risk analysis assessing uncertainties beyond expected values and probabilities. Chichester, England: Wiley. AVEN, T., 2012. Foundations of risk analysis. New York: John Wiley & Sons. AVEN, T. & RENN, O., 2010. Risk management and governance concepts, guidelines and applications. Berlin: Springer. CROUHY, M., GALAI, D. & MARK, R., 2000. Risk management. New York: McGraw Hill. ELLIOTT, D., SWARTZ, E. & HERBANE, B., 2002. Business continuity management: a crisis management approach. London: Routledge. ERM INITIATIVE FACULTY; ALEX JANDRISEVITS, 2013. 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Fundamentals of risk analysis and risk management. Boca Raton: Lewis Publishers. Peter, N. & Erik, O., 2003. Categorisation and formulation in risk management, Sweden: Blekinge Institute of Technology . POITRAS, G., 2002. Risk management, speculation, and derivative securities. Amsterdam: Academic Press. Satter, M. Y., 2013. Eurozone Banks Boost Capital by Redefining Risk. [Online] Available at: http://www.thinkadvisor.com/2011/11/09/eurozone-banks-boost-capital-by-redefining-risk SCHNEEWEIS, T., CROWDER, G. B. & KAZEMI, H., 2010. The new science of asset allocation risk management in a multi-asset world. Hoboken, N.J.: John Wiley. SMITH, D. J., 2005. Reliability, maintainability and risk practical methods for engineers. Amsterdam: Elsevier Butterworth-Heinemann. Sutcliffe, J. P., 1994. On the logical necessity and priority of a monothetic conception of class, and on the consequent inadequacy of polythetic accounts of category and categorization. s.l.:s.n. VAUGHAN, E. J., 1997. 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