Understanding Risk Management with Statistics
Imagine you are taking a road trip. You look at the forecasted weather? You look at traffic reports? You may even look at your tires? Why? All to eliminate the chance of something going wrong. That is exactly the same as risk management—locating potential problems and figuring out how to eliminate or lessen the risks.
So, where do statistics fit into all of this? Statistics are like a GPS. They help you understand the likelihood of various outcomes in order to lead you to your best decisions. Let's unpack it.
The Role of Statistics in Risk Management:
1. Identifying Risks
Firstly, you must identify risks. In other words, you must identify potential threats to your objectives. Whether it is some economic downturn, a natural disaster, a cyberattack, it’s important that you identify any possible risks first.
2. Assessing Risks
Next, you will have to assess risks. In other words, you must understand the likelihood of risk, along with the potential ramifications. For example, how likely is a data breach? Also, how catastrophic would that data breach be for your organization?
3. Evaluating Risks
Finally, you must evaluate risks. In this case, you will have to determine which risks are acceptable and which risks need to be mitigated. A lot of it comes down to weighing risks against their potential advantages and cost. Simply, you need to know if the strategies you put in place are worth the cost.
Statistical Tools in Risk Management
Statistics provide a toolbox to quantify and manage those risks:
Descriptive Statistics: summarizes the data and can serve to help review data from past risk events and to identify patterns.
Probability Distributions: tools like the normal distribution can be used to model financial risks while using others for operational risks.
Predictive Modeling: can include machine learning, to predict model risks based on historical data.
It's not about reducing all risk in risk management, it's about managing and understanding risk. You can use statistical techniques to harvest information that will inform the decisions you make to put the organization in a good position to pursue its objectives while protecting resources.
So in future opportunities to human an uncertain future, recognize that doing so will make it easier to reflect and act.
Sources:
https://profiletree.com/risk-management-unleashing-power-of-statistics/
https://www.ebsco.com/research-starters/science/understanding-risk-management