Three rules of risk management proposed by Mehr and Hedges are discussed in this chapter. List these rules and explain the implications of each in determining what should be done about individual exposures facing a business firm.
Three rules of risk management proposed by Mehr and Hedges are:
1. Do not risk more than you can afford to lose: If one takes risk more than he can afford to lose, and outcome is unfavorable, that person can even become bankrupt. A person should take proper insurance and devise strategy to mitigate risk.
2. Do not risk a lot for a little: A person takes risk in anticipation of high return. Higher the risk, higher the expected return. The risk return ratio should be high. If one takes risk a lot for little, he is making mistake.
Consider the odd: One should understand the likelihood and severity of possible losses. One should assess how much he may lose and what is the likelihood of loss.