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The Rationality of Risk: Creating Real Value After a Legacy of Easy Money

September 17, 2015 • Finance & Economics, Global Business, STRATEGY & MANAGEMENT, Surdak on Technology

By Christopher Surdak

In order to get back on the path of value-creation and rational, sustainable economic growth, businesses must first tackle their tendency towards absolute risk avoidance and recognise that risk is, necessarily, part of the value generation equation. In this article, the first in a three part series of essays on business risk management, Christopher Surdak discusses the apparent expectation of growth without risk.

Summary
When I was very young, I remember adults telling me a range of sayings about money, value, and working. Usually these sayings would go something like, “You don’t get something for nothing”, or, “Nothing of value is free.” Other favourites of prior generations included, “Waste not, want not”, “You get what you pay for”, or “A penny saved is a penny earned.” These notions of value were ingrained in me from a very young age and they’ve stuck with me, with varying degrees of success, to this day.

While many of us may be familiar with such concepts there seems to be much evidence that people believe the exact opposite of these old axioms. From government handouts to the bailout of entire countries, from corporate quarterly reports to Internal Rate of Return (IRR) hurdles set by financial executives, it seems that we humans have a built-in expectation of getting something for nothing.

 

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The principle of creating value while minimising risk is a long-standing goal of business management.  Every potential reward carries with it some related risk of loss and the role of executives, managers and leaders is to balance the risk/reward equation. To meet this expectation business people have been creating a range of tools designed to this end. Financial forecasts, Return on Investment (ROI) analyses, Management By Objectives (MBOs), Key Performance Indicators (KPIs) etc., are all artifacts of the desire to assess and manage the relationship between risk and reward. These tools are so pervasive that they are part of the basic curriculum of business and engineering schools the world-over.



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