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Risk Management for Individuals and Enterprises

v2.0 Etti Baranoff, Patrick Lee Brockett, Yehuda Kahane, and Dalit Baranoff
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1.6 Review and Practice


Key Terms Review

catastrophic risk
intangible hazards
risk

cost-benefit analysis
loss
risk averse

diversifiable risk
moral hazard
risk exposures

economic perils
morale hazard
risk neutral

frequency
natural perils
risk seeker

fundamental risk
non-catastrophic risk
severity

hazard
non-diversifiable risk
speculative risk

holistic risk 		particular risk

peril
systemic risk

human perils
physical hazards
uncertainty

idiosyncratic risk
pure risk

Practice 

  1. Provide the formal definition of risk. How is risk different from uncertainty?

  2. What are the three risk attitudes?

  3. What are risk exposures? Give examples of risk exposures. How are risk exposures different than risks?

  4. What is the difference between a loss, a peril, and a hazard? Provide examples of perils and hazards.

  5. In a particular situation, why might it be difficult to distinguish between moral hazard and morale hazard?

  6. Some people with complete health insurance coverage visit doctors more often than required. Is this tendency a moral hazard, a morale hazard, or simple common sense? Explain.

  7. Give examples of perils, exposures, and hazards for a university or college.

  8. Give examples of speculative risks for a large technology company.

  9. How might inflation cause both pure and speculative risks? Provide some examples.

  10. Define holistic risk.

  11. Describe the new risks facing society today. Give examples of risks involving technological innovations. Are these pure or speculative risks?

  12. Read the box “Is Airport Security Worth It to You?” in this chapter and respond to the discussion questions at the end. What additional risk exposures do you see that the article did not cover?

  13. One medical practice that has been widely discussed in recent years involves defensive medicine, in which a doctor orders more medical tests and X-rays than she or he might have in the past—not because of the complexity of the case, but because the doctor fears being sued by the patient for medical malpractice. The extra tests may establish that the doctor did everything reasonable and prudent to diagnose and treat the patient.

    1. What does this tell you about the burden of risk?

    2. What impact does this burden place on you and your family in your everyday life?

    3. Is the doctor wrong to do this, or is it a necessary precaution?

    4. Is there some way to change this situation?

  14. Thompson’s department store has a fleet of delivery trucks. The store also has a restaurant, a soda fountain, a babysitting service for parents shopping there, and an in-home appliance service program.

    1. Name three perils associated with each of these operations.

    2. For the pure risk situations you noted in part 1 of this exercise, name three hazards that could be controlled by the employees of the department store.

    3. If you were manager of the store, would you want all these operations? Which—if any—would you eliminate? Explain.

  15. Omer Laskwood, the major income earner for a family of four, was overheard saying to his friend Vince, “I don’t carry any life insurance because I’m young, and I know from statistics few people die at my age.”

    1. What are your feelings about this statement?

    2. How does Omer perceive risk relative to his situation?

    3. What characteristic in this situation is more important than the likelihood of Mr. Laskwood dying?

    4. Are there other risks Omer should consider?

  16. The council members of Flatburg are very proud of the proposed new airport they are discussing at a council meeting. When it is completed, Flatburg will finally have regular commercial air service. Some type of fire protection is needed at the new airport, but a group of citizens is protesting that Flatburg cannot afford to purchase another fire engine. The airport could share the downtown fire station, or the firehouse could be moved to the airport five miles away. Someone suggested a compromise—move the facilities halfway. As the council members left their meeting that evening, they had questions regarding this problem.

    1. What questions would you raise?

    2. How would you handle this problem using the information discussed in this chapter?