Assessing operational risk while using the logic of the included middle

Abstract

Abstract From the Solvency II perspective, the capital requirement for operational risk is based on the application of a standard formula. The limitation imposed by this approach as well as the definition of operational risk by establishing certain types of activities (i.e. internal processes, people, systems, etc.) as generating causes does not allow, at least for the time being, the establishment of an effective way of managing the operational risk regardless of the type of strategy chosen. Any human operator involved in the risk identification and evaluation processes, within most of the organizations, would use the logic of the included middle based on Boolean binary values (i.e. true/false, 1/0, etc.). This article attempts to logically analyze the methodological impact that would result from using a logic of the included middle which accepts that an identified operational risk and an unidentified operational risk may coexist at the same time, in a risk profile, provided that the identified one is actual and the unidentified one is potential, reciprocal and alternative but never up to the 100% limit. The included middle in this approach is the transition state, which is perfectly possible in terms of defining the topological properties of the time in which the identified operational risks analyzed are assessed. The novelty of this approach is based on the fact that the logic of the included middle, which we include in research as a concept and as a tool, was one of the nudging factors that underpinned the development of the wave mechanics (e.g. Schrodinger’s Cat Paradox) and some of the quantum physics theories later, and its use has never been tested in risk management.