At a very high level, risk can be mitigated or reduced by:
- Reducing the probability of adverse events
- Reducing the severity of loss or damage in the event adverse event(s) arise
- Reducing both the probability and severity
In addition, humans often resort to actions that reduce the perception of a risk’s likelihood or severity. These are not recommended as practical risk mitigation techniques, however.
The following four actions (or in-actions) are all legitimate forms of risk mitigation:
- Avoidance of the risk altogether. Here risk mitigation comes in the form of choosing not to take on the risk in the first place. Examples: Not buying a particular stock or making a certain financial investment; Not going mountain climbing or whitewater rafting.
- Retention of the risk without any action taken. Here risk mitigation is the decision to do nothing. Examples: Going for a walk in the dark without an escort; Not paying extra for flood or earthquake insurance.
- Transfer of the risk to another party. Here the risk is not avoided from the start, but upon further review it’s decided that the best way to deal with the risk is to let someone else deal with it. Examples: Subcontracting a difficult consulting activity to another company; Letting a subordinate deal with an unwanted business issue.
- Mitigation of the risk (or some portion of it) directly. This is the option most people associate with proper risk mitigation, in which some action is taken to reduce the exposure to risk or the damage in the event the negative outcome arises. Examples: Taking positions in financial derivatives that hedge some or all of the risk; Buying life insurance coverage; Embracing healthier eating habits.
Selection among these potential actions depends on the cost of the action itself, the risk tolerance of the decision maker, and the expected return on the risk.
Wealth as a Risk Mitigant
Wealth provides a buffer that can provide protection against various risks. Game of Thrones, the wildly popular TV drama, exemplifies the power that comes with wealth, and how that power can be used to protect oneself and weaken one’s enemies, But wealth is not a cure-all. While some risks may be mitigated. New risks arise. For example, the wealthy can more easily invest in different markets, can hire professionals to assist them on various fronts, and have the luxury of more time to spend on risk management. On the other hand, their wealth can also become a burden. Wealthy people must worry about their safety more than their less wealthy fellow residents, because they are higher profile targets for kidnapping and other crimes. They also have to worry about preserving their wealth.