Daily, farmers are faced with making many decisions about their farming operation. Farmers don’t always have accurate information available to them at the time when decision is necessary, nor can they predict with 100 per cent accuracy the factors that can affect the decision. The uncertainty of the outcome is known as risk.
Risk exists in all aspects of the farming business. Farmers will face production, marketing, financial, legal and human resources risks. Risk can be mitigated by having a risk management strategy. As part of your risk management strategy, you need to identify and understand the risks facing the operation. Next, determine your risk tolerance and the impact this has on your risk management strategy.
Risk tolerance is your willingness to avoid or accept risk. Everyone has a different attitude towards risk that will affect the decisions that need to be made. Farm managers make better decisions when they recognize their attitudes towards risk and take them into account when choosing actions. There are three broad categories of risk tolerance – risk averse, risk neutral and risk taker.
Risk averse individuals are the most cautious risk takers. These individuals will avoid risk at the expense of an increased profit. A risk averse individual is more likely to choose a risk avoidance strategy. They focus on avoiding loss at all costs to the point they miss out on some great opportunities. These individuals are likely willing to pay extra to have the security of knowing the risk has been removed or minimized.
Risk taker individuals thrive on risk. They are excited by the challenge and may seek out risky ventures as long as there is a potential positive return. These individuals are willing to accept risk.
Risk neutral individuals recognize the degree of risk in a situation and will analyze a situation before accepting or avoiding the risk. These individuals realize you must take a chance to gain an increased profit.
Whatever your risk tolerance may be, it is important to recognize it. The ability to recognize your attitude towards risk will help to make better decisions.