Three ways to deal with risks

In this post I am going to show you how to deal with things that may go wrong. This is called risk response. There are really only three ways to handle risks. I will go through them one by one.

In another post I explained what categories of risks there are. You should go and have a look at that and understand what you’re facing.

The first way is “bring it on”. You have your arms open wide and say, “hey, you want to hit me, go ahead”. Of course the only way you can do this is if you know you can take the hit. An example of this might be that you buy a twenty year old sports car that you always dreamt about. You cannot afford a new one, the old beaten up one will do just fine. Of course the risk is that it may break down (a lot) and it is not covered by any warranty. But you have no problems with that. You say “bring it on” because you love tinkering and fixing cars, you enjoy it and you can do it by yourself cheaply.

The other complete opposite of the above is not putting yourself in a situation where something could even go wrong. This is complete avoidance. If you are afraid you might be in a plane crash, avoid flying altogether. If you’re afraid of drowning, never swim. Avoidance is not always practical but in some situations it may make sense.   In the above example you may decide not to buy the twenty year old sports car at all if you don’t want the hassle of taking care of it when it breaks down.

Another way to deal with risks is to get someone else to take care of it, someone who is more capable. This is especially true if the risk is something you know is very likely, or even certain, will happen. For example we know we will all die. We just don’t know when. We also know that if that were to happen our families would be left stranded without us because of the loss of income. We cannot come up with a huge stash of money right now to make sure that won’t happen. The only way we can cover that risk is to buy life insurance. The life insurance company is rich enough to come up with that cash when such an unfortunate event takes place. But it’s not just insurance that is a solution which falls in this category of risk response. Let me elaborate.

You could decide that something is difficult for you to do. You may not have the expertise, the know-how. You don’t know what you don’t know. It might be best left to the professionals. If you don’t know how to navigate your tax laws and are afraid you might make a mistake that gets you into trouble with the authorities, you hire a tax consultant or a lawyer. Or if you have a complex electrical installation in your house and don’t want to risk burning down your house if not wired correctly, you hire a licensed electrician.

All of the above can be exercised in varying degrees or in combination depending on the situation. For example in the case of the twenty year old car, you might do some of the work yourself, but take it to the mechanic when it is a major engine overhaul. You may not have the tools or the expertise to fix that part.

Everything of course comes with a cost and you need to account for that when you decide which course of action you will take.

Hope you found this useful. Add a comment and let me know.

 

Thanks for reading.

Muneer

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s