Unrewarded risk: Difference between revisions

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An unrewarded risk is one which is not directly associated with any benefit for the party accepting the risk.  
Rewarded and unrewarded risk can be a useful way to analyse risks.  


So it is never rational - in terms of profit maximisation - to accept an unrewarded risk if it can be avoided.
It can indicate whether a particular risk is a legitimate risk for the organisation (and consistent with the organisation’s strategic plan) or not.




The concept of rewarded and unrewarded risks can be a very useful way to analyse risks, as it can indicate whether a particular risk is a legitimate business risk (and therefore consistent with the business strategy) or not.


An example of a rewarded risk is a business investment decision, such as an acquisition or the purchase of a new machine, launch of a new product and so on. Such an investment
== Rewarded risk ==
will be made because there is a reasonable expectation of a return, and hence ultimately an expectation of an increase in shareholder wealth.  
An example of a rewarded risk is a capital investment decision, such as acquiring a business or a new machine, launching a new product and so on.  


Such an investment will be made because there is a reasonable expectation of an acceptable net positive return within the organisation's strategic plan, and hence an expectation of an increase in shareholders' wealth.


Examples of unrewarded risk are operational risks such as the risks of systems failure, fire or theft, all of which may be costly to manage, and for which there is no direct return for taking.


Clearly risk which is unrewarded is best avoided where there is no cost to doing so.
== Unrewarded risk ==


Examples of unrewarded risk are operational risks such as the risks of systems failure, fire, theft or human error, all of which may be costly to manage, and which there is no direct return for taking.
Clearly risk which is unrewarded is best avoided where there is no cost or lost opportunity from doing so. However, many unrewarded risks, such as the risk of fire, theft or human error, are inevitable in business, and must be managed as cost-effectively as possible.


However, many unrewarded risks, such as fire and theft, are inevitable in business, and must be managed as cost-effectively as possible.
For example by comparing insurance providers in order to get the best deal.  
 
The cost of managing unrewarded risks must be covered by (and thus erodes) the returns earned from rewarded risks.


The cost of managing unrewarded risks must be covered by (and thus reduces) the net positive returns earned from rewarded risks.




== See also ==
== See also ==
* [[Rewarded risk]]
* [[Aggressive]]
* [[Conservative]]
* [[Diversifiable risk]]
* [[Investment]]
* [[Operational risk]]
* [[Return]]
* [[Shareholder value]]
* [[Strategic analysis]]
* [[Systematic risk]]


[[Category:Risk_frameworks]]
[[Category:Risk_frameworks]]

Latest revision as of 01:19, 16 August 2021

Rewarded and unrewarded risk can be a useful way to analyse risks.

It can indicate whether a particular risk is a legitimate risk for the organisation (and consistent with the organisation’s strategic plan) or not.


Rewarded risk

An example of a rewarded risk is a capital investment decision, such as acquiring a business or a new machine, launching a new product and so on.

Such an investment will be made because there is a reasonable expectation of an acceptable net positive return within the organisation's strategic plan, and hence an expectation of an increase in shareholders' wealth.


Unrewarded risk

Examples of unrewarded risk are operational risks such as the risks of systems failure, fire, theft or human error, all of which may be costly to manage, and which there is no direct return for taking.

Clearly risk which is unrewarded is best avoided where there is no cost or lost opportunity from doing so. However, many unrewarded risks, such as the risk of fire, theft or human error, are inevitable in business, and must be managed as cost-effectively as possible.

For example by comparing insurance providers in order to get the best deal.

The cost of managing unrewarded risks must be covered by (and thus reduces) the net positive returns earned from rewarded risks.


See also

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