Risk is one of the major factors in any business's success or failure in the free market. Risk of one sort or another is an inevitable part of any business venture. In order to make larger gains a business must take on a larger degree of risk. Risk is not merely an abstract category but a very real factor that can be calculated and dealt with in a more or less precise and scientific way.
The practice of risk management goes back to the roots of modern capitalism as the science of mathematics and statistics advanced along with the newly emerging economic system. Risk analysts are able to put risk factors into real numbers that can then be evaluated against the possible gains of any venture. Different businesses will chose different ratios of gain versus risk, but having the choices put into clear terms is immensely valuable to decision makers.
Risk control is a result of the overall project of risk management in business. Risk control involves the actual mechanisms that a business organization puts in place in order to manage the risks it takes. Different businesses will wish to encourage their employees to take different levels of risks. A stock company, for example, may encourage and reward a greater degree of risky decisions than one in a more conservative industry such as life insurance.
Conflicts of Interest
A major problem of risk management that risk control often attempts to address is the occurrence of a conflict of interest. If someone especially wishes to take a particular course of action they are more likely to discount the risks involved and liable to lose sight of the clear picture. For this reason, experts in risk control often emphasize the importance of establishing independent evaluators of risk who are not likely to be so biased.
There has been much controversy over how objective the work of risk management can really be. Particularly following the aftermath of many financial crises, critics have accused risk analysts of often fooling themselves and their businesses over the actual risks involved in any venture. Some argue that analysts use faulty mathematical models. Others go further to suggest that any disinterested evaluation of business risk is unlikely due to the many pressures of the profit motive.
- "New York Times": Risk Managemen; Joe Nocera; January 2009
- "CNN Money": The Risk Fallacy; Nomi Prins; October 2008
- Risk Institute: Overview- Risk Control; February 2000
- "Washington Post": The Art of Managing Risk; Steven Pearlstein; November 2007
- "New Yorker": What’s Wrong with Risk Models?; John Cassidy; April 2010
- "Washington Post": A Mountain, Overlooked; James G. Rickards; October 2008
- risk and gain image by Photosani from Fotolia.com