Risk aversion in business: getting through modern challenges

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Modern challenges have greatly altered traditional approaches to managing risks; besides, the concept of risk aversion in entrepreneurship has been transformed as well by the digitalization and the new ICTs. Conference at Latvian Turiba University this March is devoted to analysis of some vital issues concerning risks in contemporary socio-economic development and business.  

Background

The 21st century has been associated with numerous risks coped with newly appeared challenges; it started with the 4th Industrial Revolution, which signalized the appearance of massive digital and ICTs facilities*).

It followed by the Paris Climate Agreement Conference and the UN-2030 Agenda on Sustainable Development Goals, SDG (both took place in 2015). These modern challenges have included such aspects of contemporary growth as circular economy, energy and renewables, modernized transportation means, environmental quality, sustainable finance and tourism, etc.

All these challenges and changing socio-economic growth patterns have had not only particular effect on business and entrepreneurship; they specified some often quite predictable paths in corporate strategies and risk assessment, in general.

*) Quite interesting business predictions are revealed by K. Schwab, a founder of the World Economic Forum and an author of the book “The 4th Industrial Revolution” (2014) concerning the digitalization effects on modern growth patterns. The Fourth Industrial Revolution is the current developing models in which so-called disruptive technologies, e.g. Internet of Things, robotics, virtual reality and artificial intelligence, to name a few, are changing the way people live and work.

More in: https://www.foreignaffairs.com/world/fourth-industrial-revolution.

Vital aspects in risk evolution: digitalization

Historically, risk aversion was analyzed mostly in the investment’s activities. For example, in economics and finance, risk aversion has been often coped with “preferred but moderate” outcomes and profits and without fatal and unpredictable/unknown risks; hence, it has been often regarded better than “high-profitable outcomes” associated with high uncertainty and possible risks.

Thus, generally, the risk “mediation” is about preferring certainty to uncertainty; therefore, according to modern portfolio theory, MPT the degrees of risk aversion are defined by the additional marginal return, and investors need to accept more risk. The additional marginal return is calculated as the standard deviation of the return on investment, ROI known as the square root of the variance.

  References to: https://study.com/academy/lesson/understanding-business-trends-past-present-future.html; and to: https://www.investopedia.com/ask/answers/041615/how-risk-aversion-measured-modern-portfolio-theory-mpt.asp.

Digitalization process, with all its advantages, has had a number of risks. Just one of the latest examples concerning AI development and using Chat-GPTs: i.e. in order to prevent huge individual risks, the US government decided to forbid some AI’s platforms.

There are certain differences between the risks and challenges: the former is “an event that could possibly occur”, while the latter is an “issue” that has already happened. It means that the role of state (and the EU-wide governance, in particular) is increasing: targeted state aid, competition policies and risk management could facilitate cost-effective and risk-averse businesses.

Reference to: https://www.aferm.org/ask-the-expert/what-is-the-difference-between-a-challenge-and-a-risk/.

New business patterns: platform capitalism

Digitalization has transformed both the national growth patterns and the corporate structures; even a new term appeared, the so-called platform capitalism, which is referring to activities of numerous internet and digital companies operating as platforms, e.g. Google, Facebook, Apple, Microsoft, Amazon, Uber, Airbnb, and several others. In the digital business model both hardware and software facilities are used as basic platforms to conduct corporate activities.

These “platforms” greatly altered traditional business patterns, including such notorious four key elements of a corporate marketing strategy (so-called 4Ps): product, price, place and promotion. Additionally, the “4S” have appeared in web-marketing mix, which is supposed to assist businesses to analyze some vital elements in online and digital decisions through such means as, i.e. scope, site, synergy and system.

More in: https://www.mediummultimedia.com/en/marketing-usa/what-is-4s-marketing-mix/#google_vignette

The businesses’ digitalization process makes, actually, the whole corporate activities’ process more easy and effective: for example, it is possible to run business from one’s apartment. And it seems to be trivial: e.g. one needs a business plan, a legal address with VAT registration (due to inevitable export-import activities), bank account with a solid deposit and fast internet connection! That’s it, generally…

Eliminating risks: modern approaches

Risks have been associated with business for centuries; even presently, several hundred companies seized to exist (e.g. in Denmark and other developed states), but still several hundred are being registered anew!

One of the ways to eliminate risks is to be prepared for possible misfits and be insured; however, not all risks can be insured, and it is going to be ever more expensive…

The risks connected to digitalisation process in corporate activities are part of a general classification of risks associated with the contemporary challenges. There are four types of recognized “general risks”: strategic risks (associated for example with a competitor entering the market); compliance and regulatory risks (connected to new corporate rules and/or legislation); financial risk, associated with business loans and payments; and operational risks. However, some researchers reduce management of these types of risks to just three: financial, operational and strategic risk management; these risk management address different aspects of potential risks to ensure that a business has feasible plan to protect corporate interests and minimize potential losses and/or negative impacts.

  More in: https://www.6clicks.com/resources/answers/what-are-the-3-types-of-risk-management

   So, some adages are quite pertinent in the conclusion, e.g. that an ounce of prevention is worth a pound of cure, or a stitch in time saves nine; these and others become true even in a digital time…

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