Methods of risk management are necessary resolution methods of internal contradictions in entrepreneurial activities.
On the one hand, risk is a loss occurrence, on the other hand, it is a necessary element of entrepreneurial business, which is connected with the application of new, unusual combinations of resource exploitation. The latest bears uncertainty. Conflict resolution method is to strain after reasonable risk, and to eliminate unreasonable one. Reasonable risk is connected with the achievement of such objectives, which secure profit earning or other economic benefits. Unreasonable risk is connected with uncertainty in such actions, which cannot result in profit earning or other benefits. Irrational actions, not leading to gaining, should be substituted with rational ones, resulting in profit earning.
One of risk management methods is to avoid unreasonable risk, to replace actions, which are unable to lead to gaining, with rational ones, able to earn profit, to replace actions, which are linked to a higher risk, with more effective actions, linked to the same risk level, or with actions of equal efficiency, linked to a lower risk.
Although actions of market subjects are rational and directed for earning of profit or other economic benefits, they have an entrepreneurship element, new extraordinary solutions, or traditional solutions in unusual circumstances. Solutions and circumstances never coincide in full. Therefore, risk always remains. How can it be eliminated? – Answer. It is necessary to limit it to such level, at which potential losses are not disastrous for life, for business, or any economic activity. Second way of risk management is to avoid excessive risks, which can lead to unrecoverable negative effects. For this it is necessary to limit risks, divide, transfer to others for certain payment. Thought: when risk magnitude exceeds the limit, at which the consequence are not disastrous, the dependence of risk and profitability becomes nonlinear. Enterpreneurs do not agree on ordinary compensation of additional risk, exceeding the limit with respect to additional profit.
Excessive risk, exceeding the maximum allowed one, wherein disastrous effects may occur, can be reduced to the size of admissible one, thus doing the corresponding entrepreneurship types possible and realizable. – Risk distribution and insurance do not reduce proper loss risk in society, but decrease the amount of nonrecompensible losses and secure reasonable protection against risks for individual enterpreneurs and citizens. This makes it possible to change the benefit/cost ratio dramatically in corresponding business segments on the one hand, and expenses and losses on the other hand. Owing to the amount limitation of nonrecompensible losses to the supportable level, when the profit does not disappear, business profit becomes stable and regular.
Possibilities of risk limitation on account of diversification are limited, considering that there are fluctuations of profitability and threats of loss of asset capital value, they cannot be eliminated fully. How is it possible to reduce risks? – It is possible with respect to reconsideration of conduct rules of market participants in order to decrease the probability and possible degree of catastrophic losses. Such institutional changes take place regularly after national, regional or world crises.
Motivational aspect. Risk fear suppresses the entrepreneurial activity. The necessity of constant correlation of risk and profitability, search of their optimal combinations impedes the realization of combinations out of the most successive and effective actions of market relations participants, focused on the achievement of the best aggregate result. Flat charge for the overall risk, like flat-rate tax, allows to avoid misrepresentation of economic behaviour – under the influence of constant choice necessity of the least risky actions – and to achieve the best result of joint actions on risk/return tradeoff, which may not include quite optimal single actions (on risk/return tradeoff).
The risk is related to the ambiguity of activity and its consequence, in consequence of which it is impossible to plan and anticipate the outcome and consequence of economic activity, and entrepreneurship accurately and definitely. How is it then possible to manage risk, it it cannot be filly anticipated and projected? –Risk anticipation, projection and measurement are possible on the ground of mass statistics data, which are relatively constant as a rule and allow to measure expectable loss value for the society as a whole or its part. Then risk for an individual participant of market relations can be interpreted as an average value and loss probability, which falls on this participant.
It is rather complicated as well to anticipate and project consequences and a faithful character of single actions of an individual market relations participant. Objective receipts of business participants are multivariant. The objectives are relatively constant. Therefore, understanding the internal relations of individual partial results, one may anticipate the general result, which is connected with the achievement of main objectives and common logic achievement of this overall objective. Thus, one may anticipate and simulate the most useful ways of economic behaviour and reduce risks on their basis of their choice.
Risk is connected with possible economic losses. Striving to avoid losses affects the economic behaviour of market relations participants. Moreover, risk is necessary connected with the content of business activity. Efficient risk management is to turn it into one of the sources and factors of profit gaining. Thereupon, risk management becomes one of special kinds of professional business activity, as well as a special activity type at large-scale enterprises.
Risk management for individual participants of market relations is connected with business competition, choice of the best combinations of risk and profitability, with compensable or non-compensable transposition of risk to other market participants. However, general systemic decrease of risk level in economics is linked to the achievement of a certain defined coherence in the works of individual participants, in their resistance to opportunism manifestation and integration of efforts in the elimination of general efficiency hazards and the content of economic activity. Joint resistance to various threats is an efficient way of risk defense.