The first is the cost that will be incurred if a potential loss becomes an actual loss. The second consists of the costs of reducing or eliminating the risk of potential loss. There are situations in which risk avoidance is a practical technique. At the personal level, individuals who stop smoking or refuse to walk through a dark city park are avoiding risks. At the business level, firms can take a number of steps to avoid risk.
Jewelry stores can lock their merchandise in vaults at the end of the business day.
Many gasoline stations accept only credit cards or the exact amount of the purchase for sales made during after-dark hours. If a risk cannot be avoided, perhaps it can be reduced. Businesses face risks as a result of their operating procedures and management decision making. Risk assumption is the act of taking responsibility for the loss or injury that may result from a risk. Effective risk management has reduced the risk.