Frequency x Magnitude - the wrong measure

In the world of operational risk, there are a lot of analysts who believe that they can dimension the impacts from uncertainty by counting the number of events they experience over a period of time and then multiply that count by the average loss amount for the total event horizon they observe.

This approach for quantifying the impacts from uncertainty is full of error and it should be avoided. In fact, let's be clear, it is so fundamentally wrong as a measure of exposure that it isn't even a good estimate of how much operational risk may cost us in the future. In this article we will look at why F x M = Exposure, doesn't equal the true potential loss for operational risk and what can be done to improve this measure of risk.

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