On weekends, we often go hiking, kayaking or swimming. Some of the activities are risky. Why do we enjoy risky activities? Why not just stay at home, which is much safer?

Much of the rewarding activities involve risk, such as hunting, wars, military, political or business wars. That is why we instinctively love many risky activities. We often try to reduce risk. But does reducing risk always provide better outcome? Let us look at the risk management practices at Barrick Gold, the largest gold mining company in the world. Barrick Gold used to hedge its gold project with futures contracts, which greatly reduce its risk exposure to gold price fluctuations. This practice insulate the company from the decline of gold price.  But this practice also insulates itself from the rise of gold price. In the end, Barrick Gold unwinded all its futures positions, at great cost.

Reducing risk exposure used to be a popular practice. But more and more companies realize that reducing the exposure to risk also reduces the exposure to profit.

Next, we will turn our attention to personal finance risk management. When we take on a home mortgage, should we take a fixed rate or a floating rate mortgage? Many people take fixed rate mortgages, for they are perceived to be less risky. However, fixed rate mortgages are essentially an insurance, with the attached insurance cost. Most of the time, total payments from a fixed cost mortgage are much higher than that from a floating rate mortgage.

Today we are forced to pay higher and higher rate for car insurance, house insurance, pension deduction and many other deductions. More people view insurance as a burden instead of a risk management tool. When there’re too many risk management practices, the cost of risk management itself becomes a big risk.