An integrated operation module for individual risk management

Abstract

In this study, we used the cumulative prospect theory to propose the individual risk management process (IRM) which includes risk analysis and risk response stages. According to an individual’s preferential structure, the process has been developed into an operational module which includes two sub-modules. From this, the individual’s risk level for the confronted risk can be identified from the risk analysis, while the response strategies can be assessed at the risk response stage. Therefore, optimal response strategies can be recommended based on individual risk tolerance levels.

The applicability of the proposed module is evaluated using an A–C court case. The results show that the proposed method can provide more useful and pertinent information than the traditional method of decision tree by using the expected monetary value (EMV).

Introduction

Risk management has been widely applied in various fields such as economics, insurance, industries, and so on. While the word “risk” means that uncertainty can be expressed through probability, risk management is a structured process for the management of uncertainty through risk assessment.

Most studies on risk management have focused on the causes and effects of a risk event that occurs in an enterprise or an organization (e.g. Alexander and Sheedy, 2004, Borodzicz, 2005). While this is important, follow-up considerations for assessing risks and response for an individual of an organization not only can provide valuable information in the face of risks but also effectively result in impact reduction. However, different individuals take the same risk event with different degrees of impacts (Ward, 2007). As a consequence, the adopted actions will be different from individual to individual. In addition, studies from individuals’ viewpoints are rarely found in the literature despite their significance, in particular, for an increasingly complex environment especially if an effective strategy were to be proposed for an individual.

Thus, in this study, we intend to base on an individual’s characteristics to propose an individual risk management process we call IRM in brief, which includes two parts of risk analysis and risk response. The risk analysis procedure is to identify the degree of risk with respect to the individual’s tolerance level, while the risk response process is to assess the considered response strategy in order to provide appropriate action. To ensure the applicability and implementation of the process, the quantification and measures of each stage are investigated and developed into an operation system including two modules of risk analysis and risk response. The result will be evaluated and compared using an illustrative case.

To demonstrate the proposed system, this article is organized as follows. In Section 2, concepts of risk management and related theoretical backgrounds are introduced. Two operational modules which include a risk classification model with risk magnitude estimation for risk analysis, and a decision model for response strategy development are proposed in Section 3 with a summary of the overall system. An A–C court case will be demonstrated and evaluated in Section 4. Finally, the conclusions will be drawn in Section 5.