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Management - Essay Example

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Management Risk and uncertainty are very crucial factors in conducting business. Apparently, the aim of every investor and entrepreneur seems to be to minimize risk since lower the risk, lower the uncertainty of outcome of loss. This sounds like an ideal policy for any venture or entrepreneur who wants to stay safe…
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Management Essay
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Download file to see previous pages A deeper analysis of risk from a multi-dimensional perspective shows that risk is a very crucial but not necessarily a detrimental factor in business. Enterprises and entrepreneurs minimize the risk of their operation by managing diverse portfolios of investments and assets. However, risk mitigation may in turn decrease the chances of a bigger reward. Risk is what separates a salaried job from a business venture. Businesses flourish in short periods of time because they undertake risk and uncertainty that turns out in their favor. Risk is not the same as gambling. It is infect much more complex. Risk calculation involves global assessment of economic and financial indicators. These indicators are run through financial models to predict the possibility of a favorable outcome. The will to take risk is dependent upon certain psychological factors. The prospect theory presented in 1979 by Kahneman explains what kind of individuals or entrepreneurs would show risk seeking behavior and on what grounds. The theory talks about a reference point which is essentially a mark that defines the cases under which an entrepreneur would feel like winning and losing (The Open University 2012). This behavior defines whether an individual will show risk averse or risk seeking behavior. How an entrepreneur defines lose and profit defines his/her behavior. In the graphical representation of the theory, the portion of the curve above the reference point shows risk averse behavior while the portion below the curve shows risk seeking behavior. This essentially means that entrepreneurs show risk seeking behavior in the domain of loss that is when they expect more. More expectation leads to a higher reference point. Entrepreneurs generally set higher reference points than other people. A higher reference point over a particular distribution of outcomes suggests more potential outcomes of loss and according to the prospect theory, people under the domain of loss tend to show risk seeking behavior. Risk seeking behavior entails greater rewards and that is why entrepreneurs tend towards undertaking risks. So for small entrepreneurs, risk is a necessary factor for taking longer leaps. Risk and reward go hand in hand as well. An entrepreneur would only undertake a venture when the rewards exceed the risks or uncertainty by a specific margin. This risk and reward analysis defines the nature of the venture. Entrepreneurs use identifiers of risk and rewards for this analysis. Risk manages the allocation of capital and resources. This allocation is defined in such a way that maximum utility is driven out of the resources. Risk assures that capital and resources are invested wherever they will be the most profitable. Profit is what entrepreneurs actually seek. Profit is what encourages entrepreneurs to undertake risk, uncertainty and innovation. If a particular venture promises substantial profits when compared with its innate risk only then an entrepreneur would embark on that venture and if not then entrepreneurs look for other alternatives where the deployment of capital and resources would produce the lesser desired circumstances but nonetheless suitable. More than that, risk enhances the efficiency of resources by allocating the wasted resources on socially undesirable ventures. If these ventures had been needed in the society then they would have entailed a higher risk and reward factor. If an entrepreneur embarks on a ...Download file to see next pagesRead More
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