Value Of Risk (VOR)

The value of risk is the potential value to be attained for a certain risk taken, usually in terms of the value that it would get shareholders. Of course, in Hollywood movies, the risk is always worth it, because our hero always beats the odds. But in the real world, the odds are, well...real.

Shareholders and a company’s management want to make smart decisions with the resources they have. That’s just basic economics. Calculated risks are a part of this, whether they involve entering a new market, buying another company, or another big move.

Besides the actual move being a success or failure, the value of risk also includes the opportunity cost of time and money spent on the move. For instance, if a company risks $1 million on a venture that ends up bellyflopping, the opportunity cost represents all of the other things that they could have done with that $1 million.

In addition to opportunity costs, regular costs are complicated, too. With businesses, there’s insurance to think about, how things will be done, guesstimating ROI and timeframes, fixed startup costs and variable costs...all kinds of things.

The value of risk also includes considering risk of outside factors, like potential future regulations and other competitors. For instance, you might think putting little rockets in kids’ shoes would be popular with the kids, but regulators would probably shut that down real quick.