Economic Decision Making and Risk Management: How They Can Relate

Economic Decision Making and Risk Management: How They Can Relate

Brian J. Galli (Assistant Professor and Graduate Program Director, Master of Science in Engineering Management Industrial Engineering, Hofstra University, USA)
Copyright: © 2019 |Pages: 25
DOI: 10.4018/IJRCM.2019010103

Abstract

The definition of long-term objectives in corporate management as well as means of achieving them is often associated with uncertainty. The reason for this is apparent: managers in corporate entities cannot predict all circumstances, whether positive or negative, that is likely to occur in the future. Management during the decision-making process must be able to make informed decisions given the existence of insecurities and uncertainties in the course of business operations. Management must, therefore, take into account the risks that might occur in the future. As a result, this article aims at discussing the risks affecting corporate entities. The paper also defines and analyzes the risks, thus explaining how business entities can tackle them through making informed business decisions.
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1. Introduction

1.1. Topic Background

Decision-making is the process of generating alternate plans of action and choosing the appropriate measures for each situation (Galli, 2018). There are two essential parts to the decision-making process:

  • 1.

    Identify alternative measures to take, which means that the most ideal solution may not exist or be identifiable

  • 2.

    Decide on a suitable alternative, which means that there is a process of accepting and/or rejecting certain options

More specifically, economic decision-making involves making financial business choices. Using some accounting data is required with any economic decision and it is typical for data to come in the form of financial reports. When using accounting data to make economic decisions, one must understand the business and economic environment in which accounting information is produced. Additionally, one must be willing to apply any necessary time and energy to decipher accounting statements. There are two types of economic decision-makers: internal and external. Internal decision-makers are individuals working within a company and making choices on its behalf, whereas external decision-makers work outside of organizations to make decisions for the company (Galli, 2018; Galli, 2017).

Recent news features major corporations in the financial sector and non-financial institutions for failures relating to risk management. These failures were often rooted within poor leadership, as management boards did not fully consider the risks taken by the companies. Such risks include recklessly engaging in risky investments or utilizing faulty risk management systems (Galli, Kaviani, Bottani, and Murino, 2017; Sun et al., 2014). Some examples of corporate mistakes derived from failed risk management systems are environmental disasters (the Water Horizon and Bhopal) and accounting fraud (Olympus and World COM).

The importance of a comprehensive and effective risk management system cannot be over-emphasized. The management of corporate entities should consider various risks in the process of making decisions to determine the most optimal process of business operations.

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