Risk Management in Crisis

Winners and Losers during the COVID-19 Pandemic

Piotr Jedynak, Sylwia Bąk

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000457285
• Edition: 1
• Topic: Business
• Subtopic: Insurance
• Index: Business

Risk management is a domain of management which comes to the fore in crisis. This book looks at risk management under crisis conditions in the COVID-19 pandemic context.

The book synthesizes existing concepts, strategies, approaches and methods of risk management and provides the results of empirical research on risk and risk management during the COVID-19 pandemic. The research outcome was based on the authors' study on 42 enterprises of different sizes in various sectors, and these firms have either been negatively affected by COVID-19 or have thrived successfully under the new conditions of conducting business activities. The analysis looks at both the impact of the COVID-19 pandemic on the selected enterprises and the risk management measures these enterprises had taken in response to the emerging global trends. The book puts together key factors which could have determined the enterprises' failures and successes.

The final part of the book reflects on how firms can build resilience in challenging times and suggests a model for business resilience. The comparative analysis will provide useful insights into key strategic approaches of risk management.

The Open Access version of this book, available at http://www.taylorfrancis.com/books/oa-mono/10.4324/9781003131366/ has been made available under a Creative Commons Attribution-Non Commercial-No Derivatives 4.0 license.

1 Uncertainty and risk in the modern world

DOI: 10.4324/9781003131366-1

1.1. History of research on uncertainty and risk

Over time and as a result of dynamic technological, social and economic changes, uncertainty and risk have begun to emerge in all spheres of activity of national economies and societies on a macroeconomic scale as well as business entities and individuals on a microeconomic scale, becoming subjects of research in many fields and disciplines of science (Banse and Bechmann, 1998; Zinn, 2006; 2010; Elahi, 2013; Schiliro, 2017). Below we outline the genesis of research on uncertainty and risk from the perspective of economic and social sciences.

1.1.1. Uncertainty and risk from the perspective of economics

The need for research on uncertainty and risk was recognized in modern times. These concepts were introduced into economic terminology by Cantillon in the 18th century (Cantillon, 1755). This researcher noted inherent insecurity accompanying business activities and a major impact of risk on income formation. His theories (the long-term general equilibrium theory, the price theory, the exit theory, the quantity theory of money) formed the basis for the subsequent understanding of uncertainty and risk in the theory of economics (Cantillon, 1938). Moreover, the historical research of Laplace and Poincare allowed, among other things, to identify the relationship between access to information and risk assessment as well as the cause-and-effect relationships of risky business decisions, thus becoming a starting point for the development of subsequent methods and techniques of analysis and assessment of uncertainty and risk in the activities of business entities (Kaczmarek, 2010).

1.1.1.1. Uncertainty and risk in classical and neoclassical economics

In economic theory, the importance of uncertainty and risk was initially reflected in explaining the functioning of mechanisms governing the conduct of business activities. Economists such as Willet, Knight, Keynes and Arrow studied the possibilities of forecasting economic phenomena and safeguarding enterprises against their negative effects.

In his book The Economic Theory of Risk and Insurance, Willet (1901) differentiated between the degree of probability and the degree of uncertainty that a particular event would happen. On this basis, he formulated a rule indicating that an increase in the probability of loss occurrence is inextricably accompanied by an increase in uncertainty as to the expected end result. Willet’s research constituted a basis for further studies conducted within the scope of classical, and subsequently neoclassical, economics.

In classical economics, risk was regarded as one of the sources of costs. Smith and Ricardo repeatedly emphasized that the risk-bearing entity expects in return relevant remuneration, which was considered a component of fair profit (Pivetti, 1987). However, early economic research did not focus on different categories of risk or its interaction with market participants, so risk was understood as a natural component of operating costs (Klimczak, 2008) generated due to the fact that a business entity is never able to operate in absolute certainty. Costs can then be divided into losses and own costs. An extreme cost of uncertainty may be the necessity to discontinue operations. What contributes to the occurrence of costs of risk and uncertainty is errors in situation assessment, fear of loss or misallocation of resources (Williams et al., 2002).

The issue of risk in the light of classical economics and its links with neoclassical economics were considered by Knight (1921) in his groundbreaking work Risk, Uncertainty and Profit. Neoclassical economics does not explain the importance of risk in the activities of economic entities. Knight, however, took up a discourse in which, on the one hand, he argued that measurable risk does not undermine the assumptions of neoclassical economics, and on the other hand, he pointed out that these assumptions could not be applied in situations of uncertainty. In assessing uncertainty and risk, the author recommended relying on past experience. A slightly different approach in this respect was presented by Keynes, the initiator of Keynesianism, the leading 20th-century macroeconomic theory. In his groundbreaking work A Treatise on Probability, Keynes (1921) claimed that in the assessment of future economic events one should assume the existence of the present state as lasting indefinitely. Knight (1921) also referred to the impact of uncertainty on investors’ decisions, claiming that their decisions are necessarily accompanied by fundamental uncertainty. He also studied the relationships among uncertainty, risk and reward, and his key findings were extensively used in other disciplines (Nishimura and Ozaki, 2017).

1.1.1.2. Genuine uncertainty, benefits and costs of risk

The findings resulting from Knight’s and Keynes’s observations were also followed up in research conducted in the later periods, including that on genuine uncertainty. It was related to the need to accept the thesis that economic operators, despite various ways of hedging against negative consequences of risk, must take into account the occurrence of unexpected, previously unknown situations whose course will not be interrupted by previously taken economic decisions (Shackle, 1972).

In addition to analyzing uncertainty and risk as sources of cost, economic theory also focuses on the benefits of uncertainty and risk. Knight (1921) was the first to notice the possibility of generating profit under conditions of genuine uncertainty, calling them occasional benefits. The catalogue of benefits includes, in particular, the variety and increased attractiveness of actions taken. Other conclusions from studies aimed at identifying the benefits of uncertainty and risk in business indicate a division into benefits gained and benefits lost (Minc, 1975). The benefits and costs of risk occurrence are associated with the emergence of two categories of risk: pure risk (incurring loss without the possibility to gain benefits) and speculative risk (the possibility to either incur loss or gain benefits in the form of profit) (Williams et al., 2002).

Uncertainty and risk were also recognized as determinants of the proper functioning of economic mechanisms by Arrow, an eminent researcher in this field, for example in his theory of choice under conditions of uncertainty and risk. Thanks to the numerous works of this author, combined in the series entitled Essays in the Theory of Risk Bearing (Arrow, 1971), taking into account the importance of uncertainty and risk in economic research undoubtedly influenced the development of this field of science. According to the theory of choice in the conditions of risk, it was considered that one of the key problems was to describe its uncertain consequences. It was explained that uncertainty about consequences exists in the mind of the person making a choice and regulates their behaviour. In market relationships, the consequences of uncertainty may involve the occurrence of goods or cash payments at certain points in the future. The main conclusion of Arrow’s research is the thesis of the existence of economic entities bearing the burden of risk occurrence. In principle, these are enterprises that assume the risk of uncertainty and t...

Table of contents

• Cover
• Half-Title
• Series
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Preface
• Credits
• Introduction
• 1 Uncertainty and risk in the modern world
• 2 Concepts and standards of risk management
• 3 Challenges of risk management during crisis situations
• 4 Dominant business risks during the COVID-19 pandemic
• 5 “Risk losers” during the COVID-19 pandemic: Case studies
• 6 “Risk winners” during the COVID-19 pandemic: Case studies
• 7 Building enterprises’ resilience to crisis: Lessons learned during the COVID-19 pandemic
• Conclusions
• Index