Risk Mangement Research Paper Example | Topics and Well Written Essays - 500 words

Risk Mangement - Research Paper Example Moral hazard is a situation where an insured party will tend to take risks due to the fact that any losses that could result are covered by the insurer. Under normal circumstances, the insured party could work to avoid risks or minimize them but chooses not to due to the insurance cover that this party enjoys. On the same note, moral hazard is realized when an insured party seeks to maximize the benefits offered by the cover. For instance, a person with health insurance is likely to visit a health care facility more times than he/she could in the event that the health insurance cover is not available. This same case applies in the business environment, where business enterprises can take more risks under the notion that any losses or costs are covered by another party. On the other hand, adverse selection is the situation where decisions are made under uncertain circumstances, which primarily entail access to asymmetric information (Lam, 2003). The results realized in the process are in most cases undesired. In a buyer-seller context, the two parties could have access to different information that consequently influence one or both parties to make decisions or settle at some results that they could not choose if they initially had the same information. Moral hazard and adverse selection can actually exist independently, but their application is highly intertwined. Risk-averse individuals outnumber risk takers. Many people go to high extents to avoid risks, with only a significantly low figure choosing to take ultimate risks. For instance, the number of highly entrepreneurial firms in the business environment is low. This is because highly entrepreneurial firms are risk takers, and risk taking raises the chance of making losses. However, when a high-risk business activity succeeds, the profits reaped are enormous. Risk management is a fundamental practice in the organizational setting. Firms work their way to manage risks in order to