The structure of risk

The Structure of Risk

I'm sure that you can catch the meaning of risk in the previous chapter. In order to help understand what’s “risk” more specifically, I’ll explain to you about the structure of risk. What kind of factor causes actual losses. How people incur accidents or troubles. Understanding the structure of risk will be helpful to the further developments of risk minds.

There are mainly three factor for the structure of risk to consist of. First of all, it’s hazards, which are fundamental causes leading finally to actual losses. Secondly, there are perils that are direct factors bringing about the losses. Thirdly, it’s actual losses, the visible factor that we can recognize as something to lose. At this final stage, we regret our behaviors or decisions usually by saying that we should not have done this or should have done that.

Let’s see how you are damaged in the risk process. In the case of house fire, if you accidentally drop a half-smoked cigarette on the carpet which is partly oily because of pouring down kerosene to heat up your room or oil on the floor during cooking, what’ll happen next. There is a possibility that a fire may rise although it’s very small in the beginning. Furthermore, if this is happening while you are just preparing to go out and actually you leave home not recognizing the fact that is happening on the carpet, the fire probably will become bigger, you properties will be damaged because of fire.

In this possible scenario, the oily carpet and your accidental action of dropping cigarette are “hazards”. Fire itself is “peril”. Your damaged properties in the house are “actual loss”. Risk in my definition covers form hazards to actual loss. In other word, risk consists of uncertain factors that lead to the loss. Exactly saying, actual loss is not part of risk because it's already visible. This comes form the definition that risk means uncertainty. In the scenario, however, there is uncertainty in terms of how much damage it is. Actual loss is included in the structure of risk since the amount of economic damages is not determined.

As the case goes above, there are at least a couple of factors that lead to loss. Mixed with these factors of hazards, a peril of fire occurs, resulting in actual losse. In order to prevent this process, what’s important is to recognize the hazards. Hazards are fundamental factors bringing about losses. If you find and prevent even one of them, idealistically as many as possible, you can stop the process. However, in today’s complex world, it’s very difficult to do so. In addition to the uncertain feature of hazards, plural hazards always attack us mixedly. Like untangling the thread, it’s necessary to unveil what hazards are like in order to explicate the risk. Especially I want to focus on the nature of hazards for personal risk management(PRM).

There are mainly two categories of hazards. One is micro, the other is macro. The former hazard is very personal. Most of the loss you suffer in routine life usually comes from this kind of hazard such as carelessness, bodily conditions. Ignorance of risks is also included in the category. Micro hazards are so individual that you can control by yourselves while they offer direct damages. Furthermore, in micro hazard, there are three types, physical, moral and morale. Since the last two are very confusing, it’s necessary to give detailed explanations taking another example of falling to the ground. Suppose you are walking at midnight on a street on your way home after drinking too much. You are a little sleepy because of recent hard work. This story often happens. And here is another factor that the road is unfortunately slippery for the reason of cold weather or something. In the risky situation, when you fall down to the street, the slippery street is physical hazard, your behavior of walking drunken is moral, and finally sleeping bodily condition is morale. Although the third hazard seems to be caused by a mixture of drinks and fatigue from hard work, the morale hazard can be said as carelessness. At a risk of seeming to confuse a little, as for moral, it’s based on the principal of what is right or bad. In this case, walking drunken despite of heavily is not illegal in Japan. If you drive a car with alcohol on the street, your behavior absolutely illegal and come clearly under moral hazard.

Seeing each factor in micro hazard, all the three are controllable. Even as for physical hazard, if you are careful and have the normal power of observation, you can perceive the situation.

On the other hand, there is the other hazard in the category than micro hazard. It’s macro hazard. Different from micro hazard, this one is not controllable with a singe person. These are factors that characterize the societies of one country such as law, business conventions, social movements, technological developments and so on. Micro hazards are rather common and personal for all people over the nationalities to recognize. For example, the case as I mention above to explain the micro hazard can be seen in any country. Many people in many countries might experience it. Macro hazards, however, are very particular in one country or in one region in the country. The ignorance of these hazard may put you into a risky situation. Therefore if you want to go oversees for pleasure or business despite temporarily, you should recognize the macro hazards. Some veteran travelers may argue that they fully understand it and actually read travel guides or something. But, there are few books on the risky sides of countries except special books in particular fields such as business laws, economies, even sociology. Here is necessity for any kind traveler to recognize those hazards.

What kind of macro hazards are there? This book shows seven macro hazards, political, legal, economic(business), social, technological, natural, environmental, religious hazards. These are applicable to almost all countries on the earth. Each nation has each particular hazards. Of course, it’s desirable to understand all of the hazards which are possibly thinkable in each macro category. As for individuals, however, it seems to be impossible to do so. Even a global company, which plans to enter a foreign market in order to expand business besides its own base country, cannot carry a full research in the foreign market. Before doing so, the company will do the detailed marketing such as potential market sizes, competitors, and consumer preferences. If it’s a completely new business, the company has to make sure of any regulations for its entry. And then when it decides to enter the market, investment plans are under consideration. Nevertheless, it’s very difficult to carry out in-depth hazards especially in the field of even social, natural, religious macro hazards. A company exploring new markets cannot be so far attentive to all details.

Contrarily, there are limitations for individuals to perceive all of the macro hazards. Particularly when it comes to light-hearted travels to foreign countries, some travelers don't seem to care about them. But as something happens relaxing one's guard, it's important to make the minimum recognition of macro hazards in countries where people go.

Different from companies, what's strength is that it’s easier for individuals to cope with external environments. As I mention previously, macro hazards are not controllable. Although it seems to be contradictory, this means that ordinary people cannot change political and social systems which are some of the elements made up for macro hazards. Individuals, however, are so agile that they can flexibly adjust themselves to different political or social systems. In order to cope with uncontrollable macro hazards, in the first place, you have to understand outside factors affecting the behaviors. Let’s get deep down to each of seven macro hazards in Japan.