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What Is Comparative Risk?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 August 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Comparative risk is a term used to describe the varying degree of risk that is associated with one or more possible choices on the part of a business proposition. The proposition may have to do with some sort of enterprise such as investing in different companies, choosing to locate a new facility in one geographical location rather than a different one, or even making decisions on whether to make some change in an existing product or keep the current formula or configuration in place. Ultimately, the goal of assessing comparative risk is to identify the option that is likely to product the best possibly benefit while also keeping the risk level within acceptable range.

One way to understand comparative risk is to consider a company owner that is presented with the possibility of altering the formula for a successful product. On the one hand, making the alteration has the possibility of attracting additional consumers that will increase company revenue. At the same time, there is some risk that making the change would alienate older customers and fail to attract enough new business to offset the revenue that is lost. With this in mind, the business owner will take the time to consider each of the two scenarios in terms of what the outcome for the company could be, then decide which course of action is most likely to result in an outcome that is good for both the bottom line and the reputation of the business.

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The process of comparative risk calls for identifying all possible courses of action, then projecting the outcome of each scenario. As part of the process, determining risks in terms of the resources expended and the impact on consumer loyalty and every other factor that involves use of company resources is very important. By qualifying the type of risk involved with each scenario, then quantifying the level of risk and comparing those risks to the benefits associated with each possible action, it is easier to avoid decisions with the greatest potential to undermine the operation, and focus more on options that may carry some risk but also have sufficient potential benefits to make the risk worth taking.

Comparative risk can involve just about any type of financial or business transaction. An investor engages in comparative risk when considering the volatility of two possible investments and weighing those risks against the possible returns. Business also consider comparative risk when it comes to selecting locations for establishing new facilities such as manufacturing plants or retail stores. From product development to something as simple as changing the layout of a retail shop, taking the time to assess the risks associated with each option and to compare those risks to one another and the potential rewards will go a long way toward reaching the best possible decision.

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