How Do You Deal With Risk? (by Ryan Drollette)

posted by Decision Innovation Solutions on Tuesday, April 19, 2011

All businesses encounter risk. Risk is born out of uncertainty, or not having a perfect knowledge of future events. Risk involves making a choice when you are not certain of the outcome and that the outcome may have a negative effect. Dana Hoag from Colorado State University in his book Applied Risk Management in Agriculture states that, "Risk has two components: a payoff and a likelihood that the payoff will occur People take risks when the expected reward for doing so outweighs the cost." Managing risk means that there is a balance in the trade-off between taking risks and receiving a return.

A person or business has to know what their risk preference is to be able to effectively manage their risk. There are essentially three risk preference profiles which are: risk loving, risk neutral, and risk adverse. No matter what a person's or business' preference to risk is, there are several tools to help manage the risk that is faced. One of the most important things that a company needs is relevant and correct information. Without relevant and correct information they can try and manage the risks that lie ahead, but their efforts will not be as effective.

As the world becomes more of a global economy, the risks found in the market place become greater and more volatile. When there is a drought in Brazil or New Zealand, we can expect to see an increase in milk, corn, and soybean prices. Similarly, when there is violence in the Middle East that disrupts the flow of crude oil, we will see an increase in the price of fuel. When Japan has a shattering earthquake and tsunami that delays car parts, we will see a decrease in the production of certain cars. Understanding the risks and managing those risks with the proper and correct data becomes ever more important. Decision Innovation Solutions can be a step in the right direction with the analysis of the correct data for your business.

  1. risk
  2. risk management

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