Degree of Risk

That image discusses the concept of the Degree of Risk, distinguishing between Subjective Risk and Objective Risk, and how Probability (P) relates to the loss.

Here is an easy-to-understand elaboration:

🧐 Understanding the Degree of Risk

The "degree of risk" simply means how risky something feels or actually is. The answer depends on two types of risk:

1. Subjective Risk (The "Feeling" of Risk)

* What it is: This is the mental uncertainty or stress a person feels about a possible loss. It's personal, like a feeling or an opinion.

* High Subjective Risk: Occurs when a person feels highly uncertain about whether a loss will happen, or how severe it will be.

* Result: This leads to very conservative conduct (being overly cautious).

* Low Subjective Risk: Occurs when a person feels less uncertain about a possible loss.

* Result: This leads to less conservative conduct (being less cautious).

2. Objective Risk (The "Measurable" Risk)

* What it is: This is the measurable variation between the actual number of losses that occur and the expected (probable) number of losses. It's based on data and statistics.

* High Objective Risk: Means the actual losses are likely to vary greatly from what was expected.

* Low Objective Risk: Means the actual losses are likely to be very close to what was expected.

💡 The Role of Probability (P)

Objective risk is directly tied to the probability (P) of the loss happening.

* P represents the probability of loss.

* Objective Risk is lowest when the probability is either extremely high or extremely low, because the outcome is most certain:

| Probability (P) | Meaning | Resulting Objective Risk | Why? |

|---|---|---|---|

| P = 1 (100%) | The loss has already occurred (or is certain to occur). | Zero Risk | There is no uncertainty; the outcome is 100% certain. |

| P = 0 (0%) | It is impossible for the loss to occur. | Zero Risk | There is no uncertainty; the outcome is 100% certain. |

| 0 < P < 1 | The loss might or might not occur. | Varies | This is where uncertainty (risk) exists. |

> Key Takeaway: Risk exists only when the probability of a loss is somewhere between 0 and 1. If an event is guaranteed (P=1) or impossible (P=0), there is no risk because there is no uncertainty about the outcome.