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Positive Risk Is Ridiculous And Can't Exist: And Other Business Fairy Tales

        posted by , April 01, 2013

People don't like positive-negatives. I mean who ever heard of a pleasant disaster or lovely tragedy?

crazy but beautiful eyes of kabuki

Positive risk is a business concept that has important implications for risk management. Yet, plenty of people deny it's existence.

Positive Risk is Ridiculous and Can't Exist

The argument against positive risk goes something like this: you wouldn't say that there's a risk of winning $10 million dollars in the lottery. Therefore risk can't be positive.

This is true. By definition, risk is something that you're trying to avoid. It's rare for people to avoid positive things such as winning the lottery — but it does happen.

Positive risk is when you want to avoid too much of a good thing.

Definition: Positive Risk

Positive risk is the chance that your actions will bring too much of a good thing.

Businesses and individuals may seek to hit an exact target. In some cases, exceeding a target is viewed as a risk.

Projects & Positive Risk

Let's say you ask a contractor to renovate your home. She gives you an estimate of $10,000 and you tell her to go ahead. She does a great job and sends you a bill for $5000. She admits her estimate was a little high.

There aren't many people who worry about the risk that a contractor will charge you less than they estimated. Strangely, businesses do worry about this.

Let's say a business funds a project to improve a process. The project manager estimates the project will cost $10 million dollars and take 12 months.

The organization may control the risk that the project will be under budget or deliver early. If the project manager delivers early and under budget the organization will be happy. Spending $5 million instead of $10 million for the same project is a positive development.

However, businesses will view an under budget project as a planning error. They might point out that they could have invested the money budgeted for the project in another venture. If the project is delivered early they might point out that priorities and dependencies were thrown out of whack.

It's not that businesses aren't grateful for positive developments. However, if they let every project be delivered under budget — project managers would have incentive to over estimate every project.

This would quickly become hopelessly inefficient. If you have $100 million dollars to spend on projects for a year. If everyone estimates $20 million per project, you can only fund 5 things. If they all spend only $5 million — you could have funded 20 projects instead of 5.

Positive Risks in Financial Management

Any serious risk management initiative considers positive risks.

Investment banks monitor the volatility of their investments. The purpose of these risk management programs is to protect the assets and reputation of a firm. However, the banks also monitor positive risk. If investments are too safe — the banks know they could have improved revenue.

More: 9 Examples of Positive Risk

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