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We are constantly managing risks throughout our lives - regardless if they are simple or complicated. We manage them unconsciously during everyday activities; however, when it comes to financial markets and business administration, assessing risks is crucial.
Risk management requires attention to detail, especially when it comes to financial decisions. We listed the basics of risk management below:
1. Goal setting: The first step is to define your main goals and list them in priority order.
2. Identifying risks: The second step of the risk management process is to identify all the potential risks you might be exposed to. There are different types of risks, such as market, strategic, financial, and operational risks.
3. Risk Assessment: Now, it's time to assess the risks. Risk assessment is analyzed and categorized based on two factors: the probability of occurrence and potential impact. There are also two risk assessment types: qualitative and quantitative.
4. Risk response: The fourth step consists of defining reactions for each type of risk according to their level of importance. Depending on the nature of the risk, there are four possible response strategies you can implement:
- Risk acceptance: It is impossible to avoid all risks; sometimes, the benefits of doing a particular task outweigh the risks. So, you accept that the risk is unavoidable and take no action to prevent it.
- Risk avoidance: Some opportunities come with serious risks. If they do not bring enough benefits to your goal-achievement plan - you might just choose not to do it.
- Risk control: If it is not possible to avoid or prevent the risk, you can reduce the probability that the risk will occur or its impact if it does occur.
- Risk transfer: Some risks are inevitable, like natural disasters or accidents that occur despite all the care you've taken. So, you can transfer the responsibility for any consequences of such risks to a third party, such as an insurance company.
5. Monitoring: The final step of risk management is a continuous process, especially since the landscape is constantly changing. So, you must continually monitor the results of your risk control strategy and any new risks that may arise, making improvements to your risk management process wherever necessary.
