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Generally, Risk Management is the process of measuring, or assessing risk and then developing strategies to manage the risk. In general, the strategies employed include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk. Traditional risk management, which is discussed here, focuses on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, death, and lawsuits). Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments. Regardless of the type of risk management, all large corporations have risk management teams and small groups and corporations practice informal, if not formal, risk management.

In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled later. In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss vs. a risk with high loss but lower probability of occurrence can often be mishandled.

Risk management also faces a difficulty in allocating resources properly. This is the idea of opportunity cost. Resources spent on risk management could be instead spent on more profitable activities. Again, ideal risk management spends the least amount of resources in the process while reducing the negative effects of risks as much as possible.

The management of risk is a contradiction in terms. Management implies control. Sales managers who decide to cut prices by 10 percent do so on the basis that they control those prices. They direct supervisors to lower the prices on goods by 10 percent. They manage price by virtue of the fact that they can come to a decision about price and then exert control over price by means of an instruction or by changing the price themselves. This is management, particularly if managers order someone else to go around the store marking down prices rather than doing it themselves.

Production managers determine the quantity of output in a factory. They review what has to be reviewed, meet, talk, discuss, contemplate, and act. They issue an instruction, orally or in writing, for production to be increased or decreased by a certain amount. Since they are controlling the output of the factory, they are deemed managers. Managers are managers by virtue of the fact that they exert control over situations.

Can we manage risk in the same way we determine prices on goods or the output of a factory? If the answer is affirmative, then the implication is that we have control over future events. And this is demonstratively not so. We have no control over future events, but simply do the best we can dealing with the unfathomable.

Yet we can take actions to reduce the chances of something terrible happening. For instance, if someone insists on driving over a wet, slippery mountain road in the midst of fog in the dead of the night with the accelerator pressed to the floor and the brakes disconnected, there is a certain risk of plunging over a cliff. If, on the other hand, the driver exercises a great deal of caution, there is certainly less risk of finding oneself in free fall. And if the driver waits for the sun to lift the fog and dry the road, there is an even greater chance of surviving the trip. Certainly, risk management is involved in deciding how to undertake this trip. There is no certainty that survival is guaranteed by waiting until the sun has lifted the fog and dried the road. The chances of survival, however, are far higher than if the driver should careen around steep embankments with no visibility or brakes.

We have some ability to manage risk: we can behave in such a fashion that we enhance our chance of survival. Survival can be taken in a broader context than the safe completion of an automobile trip. Survival can mean that a company has not been forced to declare bankruptcy to protect itself from creditors, while its competitors continue to conduct business as usual. The company may have survived if its management had not taken on projects of such a magnitude of investment that the failure of one spelled doom for the company.

Survival can be viewed from a lending perspective. A loan to a company might not have to be declared worthless if the lender had not been so eager to make a loan to a company which had been even more eager to overburden itself with debt. Perhaps if the management of the company had not been so optimistic about everything going its way, and if the lender had more realistically appraised the chances that business would remain robust for the borrower, the company or the loan would have survived.

Management of risk need not deal exclusively with survival. Risk management may mean that managers have less reason not to lose sleep over adverse changes in commodity price affecting the value of their inventories, or over the possibilities of fire, wind, or storm creating a situation that may financially cripple a firm for years. There is certainly an element of being able to rest easy, or at least easier, at night when home, property, and self are protected by insurance. . .  

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