Risk Management—An Optimization Problem.

Risk management is information gathering about, and analyses of actual or potential risk scenarios, that leads to facts and assumptions (or intelligence); on the basis of which, systems and structures or a programme of action, are designed, implemented and maintained in order to ensure that the crystalisation of the risk scenario (or its possibility) is averted, eliminated, or minimised.

It involves creating and maintaining risk prevention, aversion, and minimisation structures to maximise the likelihood of an identified success or positive objective: the minimisation of any negative effects of risk crystallisation, and/or prevention or elimination of risk situations.

A necessary implication in practice is that this attempt to maximise a status, tends towards minimising the crystallization of potential or actual threats (risks). Here lies the basis for the definition of the desired ‘success’ or positive objective.

The objective narrative, to minimise risk, puts one in ‘aversion’ mode. But, the practice of risk management is better viewed from the perspective of preservation rather than of aversion, its dual. In the sense of the above paragraph, to maximise rather than minimise. Reason being that there might be a myopia in the formation of the corresponding constraints for a minimisation of risk that may lead to potential restrictions or non-consideration of legitimate or acceptable means of business. Maximization thinking gives consideration to actual business objectives and facilitates more possibilities (open thinking) with respect to the constraints while trying to adequately manage risks.

When a risk has crystallized you slip into the crisis management aspect of risk management, which may be an optimization problem — to get the best out of an unwanted situation. Some might argue that this is not an aspect of formal risk management practice. Considerations and implementations differ. What is important is that, because risk is what it is, there should be a system to deal with crystallized risks (when your fears come to pass). Trying to alleviate the effects, finding and using some gain in them, managing (live with/through) them or countering them are possible approaches. Regardless of the situation, the optimisation objective remains the maximisation of a utility.