Realigning Risk Management Priorities

Industry surveys have shown that efforts of thwarting or at least mitigating strategic, operational, and financial risks may not always be adequately aligned: financial risks are given most of the attention, whereas lesser-mitigated strategic and operational risks account for most of a company’s volatility. The novelty of this article lies in the fact that we have made a sincere effort to efficiently estimate the total number of possible risk sources corresponding to three types of risk, namely, financial, operational and strategic. To address the issue of estimation, we have put forward two different approaches for what we call a proportional method, for a more balanced allocation of a company’s risk management priorities and resources by assuming a probability distribution for each of the three types of risk sources and then estimating the number of risk resources using the method of maximum likelihood. In addition, we have also discussed a scenario in which the risk-thwarting probability corresponding to any of three types of risks might be unknown, along with the unknown value of the number of risk sources.