While there may be a debate whether risk should be assessed using qualitative or quantitative measures, I believe that is answering the wrong question.
Knowing what the level of risk is, even whether it is an unacceptable level of risk, is insufficient information.
It doesn’t answer the questions of:
- Should I take the risk?
- How much should I invest to reduce the level of risk given the opportunity cost? (Assuming the best business decision is not to take more!)
These are simple questions to ask, but not so simple to answer.
They are essential questions to answer.
If all you wanted to do was to avoid risk, you would never buy a house, cross the street, drive a car, or get married.
There are reasons for doing all of these in our personal life, and there are reasons for taking risk in our business life.
People talk about risk management enabling decision-making and go on to talk about whether the level of risk is acceptable (using terms like risk appetite, limits, and criteria).
But in real life, whether personal or business, you need to answer both of my questions.
Resources are limited.
Every penny spent to mitigate one source of risk is a penny that cannot be spent mitigating another source of risk.
Every penny spent on mitigating risk comes at the expense of investing in opportunity.
Is it any surprise…
