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What is Risk Management? A Quasi-Formal Science

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From science perspective, science divided by two type which are natural science (study material: physics, biology, chemistry) and social science (study people: sociology, economics, politics). Science require an empirical evidence usually to predict or explain. however there are another type of science that does not depend on empirical observations for this called formal science (math, statistics, probability theory, algorithm, computer science) and another is applied science that develop practical applications like engineering or medical science.

According to science definition, it is clear that risk management is quasi-formal science, it is seemingly a formal science. It is not pure formal science like math/computer science but is close to formal science.

Why it called Quasi-Formal Science?
From Management Science point of view, the research can be done on three levels:
– Fundamental Level (Mathematical: Probability, Optimization, Dynamical System Theory)
– Modelling Level (Statistic and Econometric)
– Application Level (Engineering and Econometric)

Why dont just called it Art instead of Quasi-Formal Science
Well, it can be right, which according to people and general perspective, risk management can be an art instead of science. In the recent survey it is indicated that:

  • In the U.S., 49% of respondents said “art” and 51% said “science”
  • In the UK, 58% of respondents said “science” and 42% said “art”
  • 66% of enterprise risk managers and 62% of business operations respondents say risk based security management is “art”
  • 62% of IT security and 56% of IT operations said “science”

What is Art vs Science (Practitioner vs Theorist)
Art requires certain skills which are personal possessions. Science provides knowledge and art deals with the application of knowledge and skills. To be successful it should have knowledge of science and art of applying it.

From Scopus point of view, the study of Risk Management also specific on each industry. Study by Bannerman (2008) on software project in Australia state that ” The findings challenge some conventional conceptions of risk management and project management. For example, it was found that software projects do not conform to a uniform structure, as assumed in much of the literature”. A study by Tang et al (2007) on China construction industry indicated that “Most project risks are commonly of concern to project participants; the industry has shifted from risk transfer to risk reduction; current risk management systems are inadequate to manage project risks”.

Quasi-Formal Science in Quasi-Formal Science (Risk Management in Auditing)
A study by Fraser and Henry (2007) on Embedding risk management: structures and approaches, is the example of Risk Management in Auditing which is very complex and different depend on country and industries. Fraser and Henry study findings stated that

“There was agreement that, while parent boards have ultimate responsibility, the ownership of risks must reside with management at lower levels. Companies tended to adopt a multi‐procedural approach to developing consistent risk management procedures. Internal auditors were believed to have a role to play but concerns were expressed about expertise and independence. The paper recommends a split of the internal audit and risk management functions to preserve internal audit independence and clarify internal audit roles. Audit committees are increasingly involved in risk management but there are doubts as to whether they have the time and expertise to undertake more than high level risk reviews. The paper, therefore, recommends that separate risk committees should be established to direct risk management, with audit committees adopting a watching brief over the process.”

Wow, I just realized, so far I used this ‘Risk Management’ term incorrectly. Risk Management just like Project Management term is quasi-formal science. There is no expert in Risk Management, but there is an expert in Banking Risk Management or Construction Risk Management or Software Risk Management.

Written by Anjar Priandoyo

Desember 14, 2015 pada 7:01 pm

Ditulis dalam Science

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