The Case for Risk

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By Edward R. Clark

In the last two to three years, the word "risk" has been placed in the same category as other four-letter words.  Every government and bureaucracy has proclaimed from the hilltops their hostility to this word, "risk."  We are told incessantly that risk-taking is what caused the recent, and ongoing, economic crisis.

We will leave aside for the moment the great accomplishments of the human spirit that were carried out at great risk, and the obvious fact that the willingness of some of our species to carry that risk has given us the world we see around us.

Unfortunately, those who speak in these terms do not know the difference between danger and risk.

We must understand the difference between danger and risk.  Danger is simply the chance of something that is both unforeseen and unfortunate.  Danger has a downside, terrible and tragic, and little or no upside.  We may seek, and sometimes find, a “silver lining” but this is only because of our human ability to adapt, overcome, and endure.

Risk is different.  Risk implies the possibility of pay-off.  It has both an upside and a downside.  Whereas we seek to avoid danger, risk is inherent in all human endeavors.  Things can go right, or they can go wrong.  Danger is to be avoided, while risk is to be managed.  Danger we must predict with foresight and intelligence.  Risk must be faced with courage and daring.  The test of success in danger is that the event foreseen never happens.  The test of success in risk is that the event foreseen (and desired) does happen.

Let us take an everyday example.  For the ordinary householder, fire is a danger.  It serves him no purpose.  He avoids it.  But to the firefighter, it is a risk, one inherent in his chosen line of work.  He must balance the possibility of saving the life and property belonging to the householder, against the possibility of losing his own life.  This is risk.  This is why we admire the courage, skill, and judgment of the firefighter.

All human beings have a different appetite for risk.  Some of us find cliff diving to be a relaxing activity, while others become excited over an evening of checkers.  As all men are inherently unequal, they are inherently different in their appetite or desire for risk.  This is why their are those who scale the side of skyscrapers, and those who fear to even gaze out of the window.

This is where we come to business risk, and more to the point, market risk.  Some entrepreneurs, some businesses, some investors, may wish to lower their total risk at a particular point in time, or even as a normal part of their business.  They wish to hedge their risk.  But the fact is that their risk cannot go away.  It must go somewhere.  Economic laws are just as immutable and unalterable as physical laws.  The risk can only be transferred.  The people to whom the risk is transferred are rightly called speculators.  In this economy filled with specialists, speculators are those who specialize in accepting other people’s risks.  And since they have taken on not only their own risk, but other people’s risks as well, they will rightly and properly seek a higher pay-off, their profit on the transaction.  In the nature of things, many will lose money, even go bankrupt.  Some will profit, some will even grow rich.