Risk Management - Assignment Example

Risk Management As individuals and as part of organizations, we had to make choices in the past which proved to be wrong in the long run. But lack of information and complete uncertainty forced us to take decisions based on our own judgment. Gold as an investment seemed unattractive in 2004-05, but subsequently the prices have climbed steeply. Fresh investment in electronic manufacturing sector in the 1990s has proved disastrous, with China dumping cheap electronic goods in the world markets. When a new product is launched, the market is totally uncertain.

Investment in LED products would have looked risky some years back, but it is now proving to be a sound business proposition. It boils down to the fact that individuals and business mangers will always have to make decisions with limited information, in an environment of near uncertainty. Statistical tools like the decision tree can be used to make some comparisons between different courses of action (Module 9, p.2.). All possible choices for a particular project can be listed with probabilities of occurrences of outcomes for each choice.

Different scenarios within each outcome are also assigned probabilities. For each choice- outcome- scenario combination, profitability estimates can be made. This will give a rough comparison for profitability for the different choices. Understanding consumer perception of risk will help sellers to formulate appropriate pricing strategies (p.3.). For consumer durables, extended warranty and assurance of prompt service will fetch a higher price. Managers in a privately owned firm can afford to take higher risks with better understanding by the top management.

He may go for an option with potential for very high returns, though chances of its occurrence may be very low. Understanding the different types of auctions will help the manger to quote appropriate prices for his products (…p.6.). Performance based job security and remuneration will help curb actions aimed at individual advantage and help reduce moral hazard (…. P.5.). To overcome the problem of asymmetric and hidden information, techniques of signaling and screening can be employed (p.6.).

By making selective offers, customers can be made to reveal their preferences. So, today’s manager is better equipped with tools to analyze available data and make more logical decisions. ReferencesModule Nine: Risk analysis and the economics of information.