Why the Risk of an Extreme Event Is Often Misrepresented?

Subject: Risk Management
Pages: 2
Words: 368
Reading time:
2 min

In the face of extreme calamities witnessed in the recent past, risk managers are increasingly concerned with the stability of existing measurement instruments in the evaluation of extreme risk events. Many risk decision analysts no longer consider them as expected risks but as expected catastrophes/unacceptable risks. These commonly used methods have been termed as being fallacious concerning extreme events. Sole measure of extreme risk events using their expected value often results in its misrepresentation. Various risk analysts agree that catastrophic events with low occurrence probability and fewer adverse events and a high probability of expected risk value measure can often lead to catastrophic events mismanagement and misrepresentation.

The integrated approach to risk assessment and management, more especially about catastrophic risk probabilities, requires re-examination when the expected value is the only source of risk representation. Commensuration of high-frequency risks with less damage and low-frequency risk with catastrophic, damaging events can significantly distort perception, view, and evaluation of the importance of the risk as well as its consequences. More persons are increasingly accepting that the use of expected value solely for risk analysis has various limitations. They are therefore complementing its usage with conditional expectation, which does not average extreme and catastrophic events decisions alongside frequently occurring risks.

In many instances, applying this model makes decision-makers focus more interest on events of low frequency and catastrophically damaging events while ignoring the general probability distribution. The statement is well illustrated by a case scenario where a mine is subjected to several risks over ten years. One case is, however, extreme where a worker is caught up by a conveyor chain and crushed into pieces. The total numbers of events are ten. Based on the concept of the expected value of risk, the risk is averaged without consideration of the enormous impact that one extreme event poses to the mine. It fails to consider the actual impact of the single extreme event. Focus on extreme events, expected risk value can therefore be said to overlook some of the key aspects that constitute risks facing the organization in question. It fails to consider all the risk areas that an organization is vulnerable to.