Accepting Risk

  

Unlike their arch rival, Bag-o-Glass sold exclusively to preschoolers. Bag-o-Marbles decided that they did not need to insure against injuries to kids using its product. They decided to accept risk in their business, and this financial bet is an element of risk management. Bag-o-Marbles did the math on the $10 million a year their insurance company wanted to insure for injuries sustained by kids putting marbles in, um, wrong places...and it was just too much money. They'd rather self-insure, and hope that business continues to roll.

Related or Semi-related Video

Finance: What is Event Risk?6 Views

00:00

Finance a la shmoop what is event risk risk risk risque er yeah,

00:09

how'd that get in here all right moving on investing carries all kinds of risk

00:14

inflation risk is a biggie for those who like to buy safe government low-interest [100 dollar bill inflates]

00:19

low risk paper yes their investments always pay back but while they only get

00:23

like 2% kind of returns and in a world of 3% inflation well that's a big

00:28

problem well then there's market risk too [S&P 500 graph appears]

00:31

stock markets go up and down all the time so yes over time they go up but

00:36

well you might own stock in a great company that in a bad market gets taken

00:40

down like all the other boats in the ocean when a big quake hits and suddenly

00:45

it's a tsunami time and well everything drops but historically if you hold good [People in discussion at a meeting]

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companies long enough well well their high quality bails you out of any

00:53

short-term losses you've suffered so if these are normal risks that happen all

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the time they're things that just go on and on it's all part of the investing

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world then what's an event risk which implies that something happened there

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was a vent there was a finite period of time a finite situation that made bad

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things happen with the overhang that events you know like a solar eclipse or [Solar eclipse appears]

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or the election of a smart ethical congressman well those don't happen all

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the time that's an event right it's a one-time thing well here's an event a

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meteor hits the earth and all of a sudden while the most prized possessions [Meteor strikes earth]

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are simple things like water and gas and land with wood and animals yeah that's

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an event well the value of your Amazon and Netflix stock in that case well

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those companies are probably not worth whole lot cuz internet is probably

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dead or at least injured so when wizened old investors invest they typically [Old investors appear holding stock]

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think about "once in a lifetime" events with event risk as being

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a risk that they have to account for and yes thinking about that meteor hitting

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the earth in fact is one of the things that professional portfolio manager

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thinks about when building their fund and if you want to do something a little

02:08

more realistic than a meteor what about some crazy dictator and [Rocket appears in the sky]

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Korea nuking us yeah not like one in a gazillion chance probably well more

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recent event was the near-death experience of the US financial system in

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the 2008/09 mortgage crisis where trust in banks and the banking system

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almost led to the bankruptcy of Goldman Sachs Bank of America JP Morgan and a

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bunch of other formerly perceived as bulletproof financial institutions yes

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there was an event and a whole lot of risk and we almost died

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financially anyway eventually the capital markets worked investors came to

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trust the system again and they invested their money in the stock market with [Cash piles up]

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staggering results in that the stock market went up some 400 percent in the

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decade after the financial crisis so events are a real thing you have to

02:55

think about them until you don't [Man falling to the ground on a rocket]

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