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Tutorial Doctor

Taking Risks in Business?

3 posts in this topic

There is a game mechanic called Risk and Reward. And I was just sitting here thinking about something. I asked this question to my cousin:

 

"Say you have $20,000 and you want to double it. You spedn $15,000 of it on an investment that promises you double your investment. Let's say that investment does return double. Now you have $35,000. Now you want to triple your money. However, in order to triple your money, you have to risk going in debt $10,000 and being flat broke. I wonder if businesses take risk like this often?"

 

He responded:

 

" Every business is like that. Life is like that. If you want something, you take risks. You don't change things by being safe. Apple flopped a lot with garbage tech that made them broke in the 90s, but came out by spending more to make the iPod. Sega put money into stuff.. backed the dreamcast hard and it flopped. They lost all the money. You just have to be smart with what you put your money in."

 

He went on to say:

 

"It's not good to buy a cheap camera and have your work suffer by being cheap. Because you will have to buy another one."

 

I said:

 

" Right, same way you should maintain a car to keep it running rather than having to buy another one if it fails, unless it is cheaper to buy another car than to maintain the old car."

 

I already spend my money this way. I buy quality stuff because it holds its value longer. However, I don't make back money because I don't take enough risks. My main thing is that I don't know which risks are good risks. 

 

I have asked a lot of questions on this site about game development and programming, because those are the areas I was lacking in. I don't ask much about 3d modeling, because I know about that. But now I have to consider the business side of the industry. 

 

What is your answer, as it pertains to the business side of the gaming industry, to the question I proposed to my cousin? 

 

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Um, yes?

 

Almost all businesses take that kind of risk every day.

 

Example: Business hires someone in the hope the person will be more valuable than their cost. End example.

 

 

I mean look at almost *EVERY SINGLE PRODUCT* out there.  

 

* Games require a huge investment in the hopes that they pay off. 

* Clothing, they pay for making the clothes with the hope that people will buy them.

* Food, farmers grow it hoping to make money at the end of the season.

 

As for the risk of investing more to increase your production? Also happens every day.  Simple example, deciding if you should move the business to a bigger location. Big financial outlay, risk of losing customers, but if you can double or triple your current capacity it might be worthwhile. Repeat for millions of other daily decisions around the globe.

 

There is a huge amount of science and mathematics out there to help reduce the risk and improve the rewards.

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It depends on the type of buisness.  I work for a large spreadbetting, binaries and derivatives company and everything is hedged.  We have automated exposure monitors that when reached will mean that automatic trades start to go manual and if a client takes a very large position with us we will hedge it (Usually this means phoning the bank and buying £1,000,000 of gold).

 

Once you are one of the big guys there is very little real risk involved unless you get greedy(stupid) and ignore or disable the measures that are in place to prevent you from being over exposed to the market (Which is what happened during the recent financial meltdown).

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The original question seems to distinguish between risking money you have, then risking money you don't have. Both are risks, though perhaps of a different level.

For many examples of business taking a risk, especially large multinationals, the investment may simply come from a large stockpile of cash they have anyway. But for most new startups (unless by someone who already has lots of money), it will involve getting in debt to take a risk.

(On the Dreamcast, I'm not sure I would really call 10 million of anything a flop, even if it wasn't the best seller, indeed I think the first ipod - there is no "the ipod" - was a flop too then, the risk was that they kept pouring money into it and built up sales over the years, where as for Sega it was their last.)

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