Question

What is the difference between avoiding a risk and accepting a risk?

1) When avoiding a risk, the project manager may change the project plan to eliminate the risk or condition.
2) When accepting a risk, the project owner assumes the risk because the chance of it occurring is very slim.
3) Avoiding a risk means completely eliminating all risks before the project is launched.
4) Accepting a risk means taking no action to mitigate or eliminate the risk.

Answer 1

The primary difference between avoiding a risk and accepting a risk involves the approach to potential negative outcomes: avoiding involves proactive steps to mitigate the risk, whereas accepting involves continuing with the current plan and tolerating the potential for negative outcomes, which might lead to moral hazard.

Step-by-step explanation:

The difference between avoiding a risk and accepting a risk is a critical strategic decision in risk management. When one avoids a risk, they take proactive steps to prevent the potential impact of a risk from materializing. This could involve altering plans, implementing safety measures, or choosing not to engage in the activity that carries the risk altogether. The motivation behind this is similar to buying insurance: it is an effort to mitigate low-probability but potentially devastating events.

To accept a risk, alternatively, means to acknowledge the risk but decide not to take specific actions to mitigate it. This entails continuing with the current plan (Plan A) despite the possible consequences, thereby accepting the potential losses or negative outcomes as part of the process. As mentioned in Figure 20.1, if the consequence of a threat is catastrophic, the conservative approach would be to take preemptive measures rather than accept it. Acceptance might be chosen because the cost or effort to mitigate the risk is deemed higher than the benefit of protection against it or because the probability of the event occurring is considered very low.

However, this decision can lead to what is called a moral hazard, where the presence of some form of security or insurance might incentivize one to engage in riskier behavior than they would without such a safety net. Accepting a risk without adequate consideration can be seen as a gamble that the low probability event will not occur, but with potentially severe consequences if it does. Making such a decision requires careful analysis of the financial assets involved and considerations of both the probability and magnitude of the potential risks.