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Embracing change means accepting uncertainty about the future. Of course, making business decisions is challenging when the outcomes are uncertain. An entire academic field called management science offers mathematical tools to help companies make all sorts of decisions, from setting inventory targets to making major capital investments. Central to this field is the concept of risk, a term that is widely used and often misunderstood.
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N. N. Taleb, The Black Swan: The Impact of the Highly Improbable, 2nd ed., Random House, 2010, p. xxxii.
Technically, figure 2.1 represents a continuous probability distribution, and the total area under the curve must be 1. A similar chart can be created for a discrete distribution with a finite number of possible outcomes.
M. Buchanan, Nexus: Small Worlds and the Groundbreaking Science of Networks, Norton, 2002.
Committee of Sponsoring Organizations of the Treadway Commission (COSO), Enterprise Risk Management: Integrated Framework, AIPCA, 2004.
National Research Council, Science and Decisions: Advancing Risk Assessment, National Academy of Sciences Press, 2009.
G. Dickinson, “Enterprise Risk Management: Its Origins and Conceptual Foundation,” Geneva Papers on Risk and Insurance 26, no. 3 (2001): 360–366.
B. Herbane, D. Elliott, and E. M. Swartz, “Business Continuity Management: Time for a Strategic Role?,” Long Range Planning 37, no. 5 (2004): 435–457.
R. Zolkos and M. Bradford, “BP Disaster Caused by Series of Risk Management Failures, According to Federal Investigation of Gulf Spill,” Business Insurance, September 18, 2011, http://www.businessinsurance.com/article/20110918/NEWS06/309189982
H. Kunreuther, “Risk and Reaction: Dealing with Interdependencies,” Harvard International Review 28, no. 3 (Fall 2006): 37–42
National Research Council, Sustainability and the U.S. EPA, National Academies Press, September 15, 2011.
World Economic Forum, Global Risks 2014, 9th ed., Geneva, 2014, p. 11.
N. N. Taleb, Antifragile: Things That Gain from Disorder, Random House, 2012.
Taleb, Antifragile, p. 14.
Helpful information was provided by David Bresch of Swiss Re and Brent Dorsey of Entergy.
A more holistic assessment of the value at risk from climate change would ideally include second-order macroeconomic impacts, human lives, and socioeconomic factors such as human health and ecosystem degradation.
- From Risk to Resilience
- Island Press/Center for Resource Economics
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- Chapter Two