Question

Risk is unavoidable. It is a part of our every day lives. We have learned why some people are risk takers and others are risk averse. The ten principles of risk tell us the following: 1. risk is everywhere 2. risk is a threat but it can also be an opportunity 3. we are ambivalent about risks and not always rational about the way in which we assess or deal with risk 4. not all risk is created equal 5. risk can be measured 6. good risk measurement and assessment should lead to better decisions 7. know which risks to avoid 8. the payoff to better risk management is higher value 9. risk management is really part of everyones job 10.successful risk taking organizations do not get there by accident So with that, why have firms and corporate America in general become exposed to risk

Answer 1

Firms have aspirations to grow. Without growth aspirations, firms have the risk of degenerating. But to grow, firms have to outsmart competition and hence have to take risks. This is a paradox which firms cannot escape. The amount of risk firms take depends on two factors - how desperate is the situation and how big is the risk appetite of the firm. Risk taking is always a calculated approach marred with uncertainty to some extent. But since uncertainty is anyway involved, chances are things go entirely south, even if the probability is low. Sometimes risks are miscalculated due to management inefficiency or inadequacy of knowledge, whereas sometimes risks, even if identified fully, are beyond the control of the organization. The organization in such cases bet on fortune that everything falls into place. Some firms does so because they are out of option due to industry forces, others do because they have high risk appetite and want to stay ahead of the industry curve. Due to these reasons the firms are exposed to various kinds of risks