Development and Finance from issue 2010/1

Gábor Hoványi

Thoughts on the ‘Risks’ of Corporate Development

- Abstract -

JEL L-25

The theory of microeconomics defines several methods of taking risks that are prevalent in business life. (1) The cautious risk-takers represent the ‘maximin theory’. They take into consideration the least risky outcomes (results) of a development, and in elaborating their development strategy they choose the one that should bring the highest results. (This is the so-called Wald criterion.) (2) Those on the other side, i.e. the ones taking high risks, are followers of the ‘maximax theory’. They pursue the highest possible results, and obviously accept the highest risks involved. (3) The ‘minimin theory’ is seldom found in a dynamic techno-economic environment, since the only thing its advocates aspire to is to survive in a slackened economy: namely, in this case the developer only accepts the lowest possible risk in the hope of achieving a minimal result, for the sole purpose of surviving the recession. (4) The ‘minimax theory’ is the last resort of desperate and gambling developers, who try to extricate themselves from the crisis by achieving a humble result, even at enormous risk (including the risk of total indebtedness).

Gábor Hoványi, DSc, habilitated professor (University of Pécs)

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