Risk Examples

A local government decides to build a dam across a large river. It relies on scientific studies predicting that the water level on the upstream side of the dam will rise only slightly, causing minor inconvenience to the ecosystem. This is environment risk. The first dimension of the risk is that the scientific studies are wrong and that there will be significant damage to the environment. The second dimension has to do with the extent of the ultimate damage. It may be only slightly bigger than forecast, or it may be massive, causing great damage.

A multinational corporation acquires mining rights in a politically turbulent country. The company is facing political risk. The first dimension of risk is that there will be a revolution, adversely affecting the corporation. The second dimension is the extent of the damage. It’s possible that the new government will wish to encourage the firm’s presence and activities, in which case losses may be minimal. A worse outcome would be a decision by the new government to nationalize the entire mining industry, leaving the corporation empty-handed.

An orchestra conductor interprets a piece of music and delivers it to a critical audience. This is reputation risk for the conductor. The first dimension of the risk is that the interpretation may be met with disapproval. The second dimension is whether the damage will be limited to a few unfavorable press articles or at the extreme, to the conductor losing her job.

A public health laboratory receives and tests a potential bio-terror sample found in the local community. This is an example of health risk for the community. The first dimension is that the laboratory results will erroneously label the sample benign. This will mean that no quarantine will be set up, and no efforts will be made to deal with the source of the danger. The second dimension is the extent of the damage subsequently suffered by the local community. It may be that the error will be recognized in time to avert disaster, but it may also be the case that a large scale pandemic will ensue.

A bank lends money to a corporation. From the lender’s perspective, this gives rise to credit risk. The first dimension of the risk is the likelihood the corporation (the borrower) will run into financial difficulty, and will be unable to pay back some, or all, of the loan. The second dimension of the risk is how much money will be recovered by the lender in the event the borrower does indeed run into financial difficulty.

An athlete participates in a contact sport. The relevant risk for the athlete is health or physical risk. The first dimension of risk in this example is that the athlete may be injured. The second dimension is the extent of the injury, in the event that an injury does occur.

A politician decides to take a particular stance on an issue. The main risk for the politician is reputation risk. The first dimension is the possibility that the electorate will take a dim view of the politician’s position. The second dimension is the extent of the damage to the politician’s public standing in the event the public does take an unfavorable view.