Risk is uncertainty of outcomes, and the essence of risk management is managing that uncertainty. There are two fundamental ways to manage risk: first, by quantifying the uncertainty of outcomes and incorporating it in making decisions; and second, by strengthening defences against losses from adverse outcomes.
Take the case of an investor wanting to invest in a property. All else being equal, London is preferable over Dublin as house prices in London have historically been much less volatile than in Dublin: a way to quantify the uncertainty of future house price change. And for regulators, a 30% investor deposit is safer than 10%. Even if the house price falls by 20%, the investor will still own an asset worth more than the loan, and is less likely to default.
