An unknown risk is a potential loss that is not recognized or identified. In the context of risk management, unknown risks are those that have not been identified and managed as part of the risk management process. These risks may be difficult to predict or anticipate, and can have significant impacts on an organization if they occur.
Unknown risks can be particularly challenging for risk management, as they are not accounted for in risk assessments or management strategies. This can make it difficult for organizations to prepare for or respond to these risks effectively. To address unknown risks, it is important for organizations to have robust risk management processes in place to identify and assess potential risks, as well as to have contingency plans in place to mitigate their impacts.
Unknown Unknowns
An unknown unknown is the state of being unaware that a particular type of knowledge exists. For example, an investor who is unaware of the concept of liquidity may purchase the stock of a firm with a high debt load, negative cash flow from operations, rising cost of capital and other issues that make bankruptcy possible. Such an investor is exposed to a firm’s liquidity risk without knowing that such a concept exists.
Black Swans
Black swans are a class of high impact, low probability events that are difficult to predict. In some cases, low probability risks are excluded from risk management because they seem so improbable. However, events that are high impact may be a significant risk even if their probability is extremely low.
Risk Identification Shortfall
Risks may simply be missed by the process of risk identification. For this reason it is common to involve all stakeholders in risk identification and to bring in subject matter experts as required. For example, an information security expert may be required to identify risks to an information technology project.
