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Risk and Unrealistic Promises, by Seth D.
The problem so much of this country faces can be sourced back to one common practice that many of us cannot bring ourselves to face. Unrealistic promises. The world is full of risks, in fact life could be described as nothing but a massive risk management exercise. Will my paychecks be enough to cover my bills this month? Will I have any unexpected expenses this month? Will a plane fall out of the sky on to me? Will my business be adversely affected by Obamacare? Will the price of oil rise so high I can’t afford my commute? Will the value of stocks, bonds, gold, land, or whatever I use to hold and grow value over time crash? Will those investments go through the roof and I will have missed the opportunity to invest more?
Many people in business spend a lot of time trying to quantify and figure out manage risks but the important thing to remember is that risk never goes away. It can be diced up, spread around, shared, concentrated, traded, bought, and sold but it never goes away. Just because you bought an insurance policy or a derivative to offset your risk doesn’t mean the risk went away. You just replaced it with a different risk. You got rid your basic risk and replaced it with the risk the insurer or derivative originator won’t be able to pay out according to the policy or contract. You had better know how much in reserve your partner has to cover these risks and what their total exposure is. AIG sold contracts with 72 trillion dollars’ worth of exposure with almost no reserves and zero visibility to their clients or regulators. Let’s put that in perspective, global economic output in 2011 was just under 70 trillion dollars. Lesson learned should be lack of regulation may allow for business innovation but that innovation may not be good thing for the unwise. Always know your business partners. Don’t accept what they say on its face. Dig deep, analyze, if they have a problem disclosing information you need to be a wise investor, walk away.
That’s not to say that risk is a bad thing. Risk is simply a fact of life. Let’s define risk. Risk can be defined as a noun meaning “a situation involving exposure to danger” or as a verb meaning “expose to danger, harm, or loss” Taking risks can result in a reward if the expectations are met or exceeded but result in loss if expectations are not met. In business we often express risk in terms of probability such as 1/3 chance upside risk outcome, 1/3 chance of expected outcome, and 1/3 chance of downside outcome. Equations are developed for each of these three scenarios and a weighted outcome is calculated usually expressed as a return on investment.
Strangely one of the best expressions of the benefits of risk was not expressed by a capitalist but a communist and not just anyone but The Communist Karl Marx.
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