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■ CHAPTER 1 Definitions of Risk and Risk Appetite 3

By1.1 Risk and Open Systems

Not long ago, the Biologist Karl Ludwig von Bertalanffy introduced the concept of open systems.1 At that time, no one could have imagined that this concept would extend to all activities, including those of business entities. The open system concept states that no system, person, organization, or object is completely self-contained; every system is open to “its environment”; it can affect the environment and the environment can affect it. Thus, any organization or system is impacted by elements over which the organization or the system has no control. It follows that the impact of the environment on the organization would be unpredictable, which led von Bertalanffy to conclude that uncertainty is a fact of life for every organization or system, which echoed the words of Frank Knight as he writes:

It is a world of change in which we live, and a world of uncertainty. We live only by knowing something about the future; while the problems of life, or of conduct at least, arise from the fact that we know so little.