Risk and Reward Assessment
Risk assessment is an important component of any management decision. When considering risk, managers rarely have perfect and complete information. There is an entire science of Risk Assessment but for our purposes in this class, we will not be exploring this subject at that level.Risk is measured by considering the potential amount of loss and the probability of the loss occurring. A manager will identify and analyze all the risks associated with a given option being considered. The next step is to use information available to assess the potential amount of loss, if the decision does not result in the desired outcome. This is done for each risk associated for each option. With this information, the manager will make a final decision on the best path to follow based upon the probability of the loss occurring weighed against the potential gain. Naturally, options that have a high potential loss and a high probability of failure are not the optimal decision unless the payoff is great and the loss can be absorbed if the action fails.