Part 2: Don’t let terms get in the way!

It frequently happens that a group of experts use a term so differently that they just cannot agree on a single meaning or definition.  This problem arises in spades in the area of ‘risk’. For example, in traditional operational risk management (ORM), when you measure risk, you multiply the probability of a loss times the amount of the loss.  In the modern view of ORM, risk is a measure of loss at a level of uncertainty. The modern definition of risk requires both exposure and uncertainty[1].  So you get two different numbers if you measure risk from these different perspectives. One can go round and round with a group of experts trying to agree on a definition of ‘risk’ and generate a lot of heat with little illumination.   But, when we change our perspective from the term, and instead start looking for underlying concepts that everyone agrees on we don’t have to look very far.  When we found them, we expressed them in simple non-technical terms to minimize ambiguity.   Here they are:

  1. Something bad might happen
  2. There is a likelihood of the bad thing happening
  3. There are undesirable impacts whose nature and severity varies (e.g. financial, reputational)
  4. There is a need to take steps to reduce the likelihood of the bad thing happening, or to reduce the impact if it does happen.

After many discussions and no agreement on a definition the term, ‘risk’, we wrote down these four things and asked the experts: “when you are talking about risk, are you always talking about some combination of these four things”?  “Yes” was unanimous. The experts differ on how to combine them and what to call them. For example, the modern view and the traditional view of risk each combine these underlying concepts in different ways to define what they mean by ‘risk’.  In the modern view, if the probably of loss is 100%, there is no risk because there is no uncertainty.   The concept that is called ‘risk’ in the traditional view, is called ‘expected loss’ in the modern view, but it is the same underlying concept. Compared to wading through the muck and the mire of trying to agree on terms, focusing on the underlying concepts using simple non-jargon terms is like a hot knife going through cold butter. Terms get in the way of a happy marriage too!  How many times have you disagreed with your partner on the meaning of a word?  It’s more than just semantics, it’s often emotional too.   I believe we are all divided by a common language, in that no two people use words to mean exactly the same thing, even everyday words like “support” or “meeting”.    I have learned that it is easier to learn and use the language of my spouse than it is to convince her that the term I use is the right one (despite the seductive appeal of the latter).

[1] “A New Approach for Managing Operational Risk Addressing the Issues Underlying the 2008 Global Financial Crisis”  Sponsored by: Joint Risk Management Section, Society of Actuaries,  Canadian Institute of Actuaries, and Casualty Actuarial Society

For further reading, refer to Michael Uschold’s additional posts in this series.

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