This will be a real challenge but it should be an interestin

This will be a real challenge, but it should be an interesting challenge. Much of the way we measure risk relies on probability distribution (the Bell Curve as shown on page 425). For many things in life, and business, this is perfectly valid, but for others it is not. Can you come up with some illustrations of business risk measurement where the bell curve type analysis is inappropriate? This will take a little research on the internet. Why may the Bell Curve be an inappropriate tool for looking at market risk? Find out what Mandelbrot (The Mis Behavior of Markets) and Taleb (The Black Swan) have to say.

Solution

Bell Curve

Question:

Can you come up with some illustrations of business risk measurement where bell curve type analysis is inappropriate?

Solution:

Bell curve has lot of applications in business processes which follow normal probability distribution. But it is not appropriate to use bell curve everywhere in business risk measurement. All business risk processes are of different shape and might not follow normal distribution. Some of the defects or equipment failures follow Poisson distribution. Some business processes are better defined using exponential or Gaussian distribution. All business processes are also not symmetric and have different shapes. Also to measure business risk by bell curve one should be have good cognizance regarding calculus to define business risk. Revenue, income and margin distributions don