When Fear Is Good: Risk Management Techniques
Fear is an emotional reaction to a recognized danger, be it known or unknown. It always causes stress, sometimes panic and even paralysis afterwards. In a nutshell, it is considered as a negative effect. So why would anybody say that fear is good?
There are actual instances wherein the feeling of fear invokes a more powerful and more positive mental response. For instance, the fear of the unknown may push a person to do exhaustive research on the subject to obtain the ins and outs of it.
Business-minded people, specifically investors, usually do this technique. Their end goal is to ensure that they will get much better results compared to a person who just blindly invests without even knowing anything.
Not everybody can be successful through investing, though. It requires months of study, enough skills and knowledge, and even a considerable amount of funding to be successful in the field. There are several traits a good investor should have that help him/her in achieving success in the industry. But one important factor that should not be ignored is risk management.
Risk management process
Generally speaking, risk management is the process of identifying risks and taking proper action to minimize or prevent damage. Its goal is to protect the business from being vulnerable. While it is not as simple as writing or cashing checks, risk management has become part of the never-ending process of entrepreneurship while also having its own system.
There are five main stages of risk management. They are:
- Identifying the threats – Prevention is always better than cure. Knowing the threats before they happen is always better than acting on them as they happen. This is the main objective of risk management: preparation.
- Assessing the impact – After the threats are identified, certain calculations are done to gauge how heavy the effect will be should the threats materialize. It is crucial to determine how much damage a potential danger can do to the business so the right measures should be taken to prevent it.
- Predicting the effects – Next, business owners must determine what would happen next if the damage is done. This phase focuses more on the “worst-case scenario” so as to prepare for everything and not just the immediate obstacles.
- Reducing/eliminating the risks – This stage of risk management deals on figuring out a way to reduce (if not eliminate) the risks and, consequently, the threat itself. This is one of the most important stages of risk management: risk managers must be able to create a solution to the problem itself.
- Prioritizing the risks according to importance – This part dwells on the different threats and risks identified throughout the whole processes and arrange them according to how grave the effects can be and then deal with them one by one. Most of the time the heaviest threats are dealt with first, given the fact that they are the most important and may cause the biggest damage.
There are three distinct factors an investor can get from risk management. These three are:
- Secure investing –Doing some homework on the prospected investments would not hurt. Learn everything from what the investment would be to the people and companies that will be involved in it. Making sure the investment is safe and secure is, of course, always a good plan.
- Minimizing losses – If the investment is not profitable, or there are absolute facts that point to damages (or even losses), risk management will be very handy. Applying the five-step process mentioned above would ensure that, even before there is a risk of losing the investment, certain actions are already set into motion to prevent these types of disasters from happening.
- Bridging the gap between investing and gambling – Investing and gambling are two different things but, if seen in another perspective, has a lot of similarities. Generally, the main sense of both is that investing is good while gambling is bad. Investing is a risk-averse, continuous type of business that deals with saving for specific goals like an ownership of something tangible. On the other hand, gambling is a risky type of entertainment where the odds are almost always against the gambler. It can also be addictive and destructive and is usually based on luck and emotions. However, both deal with analytical thinking and crucial split-second decision making that, in the end, might reap a good enough reward. Both are not absolute, the element of chance is always present. And both deal with (in a certain extent) risk management. A professional gambler would always take into account the odds depending how much he can win against the risks he will be taking. At the same time an investor would consider the odds depending on how much the investment would grow against the possible risks he might be taking as well. Of course, knowing where the line is between the good (to invest) and the bad (to gamble) is important.
“It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges” – John Maynard Keyes