Basic theories of risk in economics

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:54

The concept of "risk" is found in different sciences, each of which interprets it in its own way in a particular scientific area. Thanks to this approach, psychological, environmental, economic, legal, biomedical and other aspects of risk are distinguished. A large number of aspects of one concept is explained by the fact that rice is a complex phenomenon, the foundations of which often not only do not coincide, but are completely opposite to each other. According to one of the traditional approaches, risk is a measure of possible failure, danger in relation to a certain type of activity.

Any commercial organization seeks to obtain the maximum possible profit. This desire is limited to the possibility of incurring losses, or, to put it another way, the concept of risk is formed here.

In the conditions of the modern market economy in Western literature, there are two main theories of risk - classical and neoclassical.

Classical theory

The representatives of the classical theory were Mill and Senior,allocated in entrepreneurial income a percentage of invested capital, a payment for risk and a capitalist's wages.

In the classical theory, economic risk is identified with the mathematical expectations of losses that accompany the process of implementing the chosen solution. The main provisions of this theory lie in the definition of risk as the probability of losses and losses accompanying the chosen strategy or decision. Economists have strongly condemned this one-sided interpretation of risk.

Neoclassical theory

Economists A. Marshal and A. Pigou in the 20-30s of the XX century developed the second theory of risk. According to neoclassical theory, entrepreneurship operating in uncertain conditions should be based on two categories: the amount of expected profit and the probability of its deviations. The concept of marginal utility, according to this theory, determines the behavior of the entrepreneur. Accordingly, when choosing one of the two possible options for investing capital with the same profit, preference is given to the one where there is less fluctuation in profit.

According to the neoclassical theory of risk, the value of a guaranteed profit is higher than a profit of the same magnitude accompanied by fluctuations. J. Keynes, in addition to the neoclassical theory, pointed to "risk propensity": if we take into account the risk satisfaction factor, then an entrepreneur can take more risk just for the very expectation of more profit. The neoclassical approach assumes that risk is the possibility of deviation from the set goals.

Despite all the elaboration, in those days this theorynot considered an independent branch of knowledge. Risk-related scientific developments at that time were carried out within the framework of more important economic theories.

The concept of "risk" and its definition

Today there is no unambiguous understanding of the essence of risk. This is largely due to its almost complete disregard on the part of economic legislation in management activities and economic practice. Risk is a complex concept that combines opposite and mismatched real bases. Various definitions of the concept of risk also depend on their presence.

Domestic and foreign authors give different concepts of risk theory:

Potential and measurable probability of loss. This concept characterizes the uncertainty associated with the possibility of adverse situations and consequences during the implementation of the project.
Probability of loss, loss, profit and shortfall in income.
Uncertainty of future financial results.
By J. P. Morgan risk - the degree of uncertainty of future net income.
The cost of a possible event that could lead to losses.
Chance of danger, adverse outcome, threat of damage and loss.
Possibility of losing any values - material, financial - in the course of activity, provided that the situation and factors of its implementation undergo changes that differ from those provided for by calculations and plans.

It is worth noting that the concept"Risk" can be interpreted in different ways depending on the specific area. In the case of insurers, it means the object of insurance, the amount of insurance compensation, in the case of investors - the uncertainty that accompanies investments at the end of the specified period.

Under the risk in the science of riskology understand the danger of losses, the possibility of which stems from the characteristics of human activities or natural phenomena. If you think in economic terms, then risk is an event that may or may not happen. If such an event occurs, it can lead to the following results: positive - profit, zero, negative - losses.

Types of risk

Regardless of what processes are going on in the company - active or passive - the risk accompanies each of them.

The third side of the risk is belonging to a certain type of activity. Simply put, a project that is being implemented by an enterprise is subject to market, investment risks; the company bears risks even when it does not take any action - market risks, risks of missing profits.

For this reason, it is necessary to reveal the essence of the main types of risk that the company has to face.

Today there is no standard classification of risk theories. This is due to the fact that in practice various manifestations of risk are identified, and different terms can be used to refer to the same type of risk. In addition, in most cases it is difficult to separatetypes of risk from each other.

Despite this, the following classification of the main types of risk is distinguished: market, credit, liquidity, legal, operational.

Credit risks

Under the credit theory of risk understand the losses accompanying the refusal or inability of the counterparty to fulfill its credit obligations in full or in part. A company that trusts its own capital to someone assumes credit risk. For example, a buyer, after being given obligations to pay for goods, may refuse to fulfill them.

Market risks

Market risks are associated with losses that may arise from changes in market conditions. They depend on exchange rates, price fluctuations in commodity markets, stock exchange rates and other parameters. For example, when concluding a contract for the supply of goods with a buyer after a certain time period, it indicates a fixed delivery price. The buyer may refuse to perform his part of the transaction when the terms of the contract have come up. At this point in time, the market value of the product may fall significantly, causing the company to incur losses. Risk assessment theory is often used to avoid this situation.

Liquidity risks

Possibility of incurring losses caused by the lack of funds on time and, as a result, the inability of the company to fulfill its obligations. A risk event, by its occurrence, can provoke damage to the company's reputation,fines and pen alties up to its bankruptcy.

Operational risks

Operational risks - potential losses caused by errors, equipment failures or illegal actions of personnel. As an example - the risks of manufacturing defective products, the cause of which is a violation of the technological process.

Legal risks

Legal risks are associated with the current legislation and the tax system. They may arise due to a discrepancy between existing norms and laws and company documentation. For example, a contract drawn up with legal violations can lead to the recognition of the transaction as invalid.

Modern development of theories

The problem of entrepreneurial risk became more and more multifaceted as market relations developed: investment risks, risks in lending associated with man-made causes, price fluctuations, natural disasters, fluctuations in consumer demand. English economist John Maynard Keynes solved most of these problems by introducing the concept of "risk costs" necessary to cover the difference between expected and actual returns. Costs can be caused by fluctuations in market prices, destruction due to natural disasters or depreciation of machinery and equipment.

According to Keynes, the entrepreneur is obliged to comply with safety and risk theories, taking into account the different directions of entrepreneurial risk:

The risk of losing the intendedbenefits due to unforeseen circumstances;
Creditor risk associated with the possibility of loan loss;
Risks associated with declining monetary value over time.

The idea of taking into account material gain and "inclination to gamble" when assessing risks also belongs to Keynes. This, to a certain extent, explains the prevalence of gambling.

Special study of risk began only in the first half of the 20th century, after the development of all the tools necessary for this - statistical, mathematical and economic. The risk at this time is perceived from a quantitative point of view - the calculation and comparison of the costs and benefits that have occurred, the calculation of the probability of an unfavorable and favorable event. In the rationalist tradition, the only answer to the problem of risk is to try to avoid harm.

In those days, rational human activity, which was considered effective in uncertain conditions, was considered a panacea for any damage. The American economist Frank Knight in 1921 in his work "Risk, Uncertainty and Profit" for the first time focused on the problem of rational behavior under risk. It was he who first suggested that risk is a quantitative measurement of uncertainty.

Development of theories in Russia

The problem of risk assessment and management theory for the domestic economy is not new: a number of legislative acts adopted in the 1920s were developed taking into account production and economic risks,existing in Russia. Real entrepreneurial spirit, characteristic of market relations, was destroyed as the administrative-command system took shape. Accordingly, the concept of risk in the economic dictionaries of that time is practically absent.

In a planned economy, efficient economic activity was formed without risk analysis due to the dominance of administrative methods of management in the country. From this one can understand the disinterest in the theory of financial risks.

Interest in the theory of risk management in economic activity appeared only with the implementation of economic reforms in Russia, and the theory itself not only began to develop in the course of the formation of market relations, but received great demand. Today, entrepreneurial risk is a legitimate part of the market, as well as its other attributes - income, demand, profit, and others.

Without understanding the basics of risk theory, it is impossible to take into account and analyze it in business activities and correctly assess economic risks.