Almaty Management University

PhD, Senior lecturer, Aiman M. Kazybayeva

Master of economic sciences, Lecture,

Vladislav V.Ostrovskiy

Origin and nature of risks

Nowadays the risk is an essential element and it plays an important role in the economic life, accompanying almost all spheres of activity of any organization, operating in modern market conditions.

Probably, that is why earlier a risk meant scales, the bowl of which can swing in the direction of success or failure. Decision-making should be balanced and less exposed to risk. Businessmen widely know the phrase as “Break-Even Point”, which means "destabilization point, disbalance point." This definition means the point of equality of chances or point of crucial moment, where success and failure are zero, i.e. they are on the same line of weights.

This definition is directly connected to the concept of risk, which also implies a balance between the possible income and the possible loss. Herewith, this balance is maintained and provided directly by the businessman, who in turn needs to present possible factors systematically, influencing on its operations and risks that may appesr (Vorobyov S.N.).

Despite the enough new trend in the field of risk management, the concept of "risk" has a fairly ancient roots, for example, from Old Italian the word «risicare» is translated as "dare", from the Spanish-Portuguese "reef." To a large extent, the history of the formation of the concept of risk comes down to a person attitude to the future, to the uncertainty (Akimov V.A., 2004, Lesnych V.V., 1999, Radaev N.N., 2004).

Let us look at the history of the risk theory formation from the XVIII century to the present time.

In the Middle Ages there was a rethinking of the fact that the future depends on the person. As a confirmation, I can bring a vivid example of the creation of the probability theory, which allowed making an abrupt jump in human evolution, allowing making quantitative forecasts of the future. Its creation was due to the fact that the French mathematician, philosopher and inventor Pascal studied gambling games, then, as a result of collaboration with the mathematician Fermat, there was well-known theory of probability.

In the middle of the XVIII century French mathematician A. Moivre introduced the concept of "standard deviation", which meanы the structure of a normal distribution and risk level. In 1738 Bernoulli determined the expected utility, which the theory of portfolio investments is based on at present. Bayes theorem and Bayes formula is one of the basic theorems of probability theory and it shows the effect of the degree of awareness about the management object to decisions-making.

From the abovementioned historical data about the development of the theory of risk, it can be concluded that the discovery of the basic laws and theories of risk management falls at XVIII-XVIII centuries.

The appearing of various theories of risk is directly related to the active development of the market economy. Thus, for example, the word «hazard», is widely used both in the works of Adam Smith and of other economists. And since 1830, the term "risk" began to be applied only at the insurance operations. This points to the fact that for nearly a hundred years the concept of risk and danger were used in parallel and only in the XX century the concept of the risk of finally became permanent in the economic literature and business practice (Vishnjakov Ya.D., Radaev N.N., 2004).

The most active risk was begun to study only at the end of XIX – at the beginning of XX century. In the economic literature there are two main theories - classical and neoclassical theory of risk.

One of the most prominent representatives of the classical theory of risk are famous English economists and thinkers of the XVIII century, John Stuart Mill and Nassau William Senior. Investigating entrepreneurial profit, economists identified two main components in the structure of income – interest rate as a share for the invested capital and payment for the risk as a compensation of possible risk, connected to business activities. In the suggested theory risk is regarded as damage to property, which businessman can gen in the implementation of the chosen solution. Such a narrow and one-sided interpretation of the risk was criticized by many economists.

Economist Richard Cantillon (1730) was the first to introduce the concept of "entrepreneur", presented a man who buys by a known price, and sells for an unknown and, therefore, which bears the risk. He referred entrepreneurs to all of those who have an uncertain earnings, for example, farmers, beggars, thieves, etc. Cantillon also first presented his point of view, that for the entrepreneur the most specific function is the appliying the risk or uncertainty (Avtonomova B., Ananyina O. and Makasheva N., 2008).

Another representative of the classical school is a German economist Hans Karl Emil von Mangoldt, who in 1855 presented the work "The real purpose of the entrepreneur and the true nature of business profits." Mangoldt presented the application of risk as a major role function for the entrepreneur. As for the theory of risk, Mangoldt divided two concepts: "commercial production" and "customised production". In the commercial production there is uncertainty, and therefore the risk, because the product is hold for sale at uncertain demand and unknown price.

Exactly for this concept Mangoldt was the first who stated about the presence of risk and the degree of its assessment, which a businessman bears. In this regard, an economist introduced the time factor to the research. Thus, the more is the length of time, the more is probability for an entrepreneur to risk and loss, less achievement of possible success and, therefore, more the expected reward.

In the customised production, he confirmed a guaranteed income, as the customer and the price is known in advance, and consequently, the risk is minimal or even may be absent. In such situations, according to Mangoldt, the uncertainty is almost removed, which accompanies the process between the beginning of the production and sale of the end product.

According to Mangoldt, entrepreneur takes the full responsibility and have to make his own decisions, related to investment fluctuations, which may appear. Role purpose of entrepreneur according to Mangoldt is making decisions in an uncertain situation.

It is worth noting that the entrepreneur in the proposed theory received time frame in his work for the first time. This laid the foundations which contributed to the further development of issues, related to the study of entrepreneurial risk and income (Dynkin A.A., 1992).

In England in the 20-30 years of XX century there appeared neoclassical theory. Its most important representatives were such scientists and economists as Alfred Marshall and Arthur Cecil Pigou, but the greatest development the risk factor got at the American economist Frank Knight Heineman (1985). It was he who articulated the concept of risk more fully, as an important component in business, and developed a distinction between risk that can be measured and that can not be (countable and uncountable risk) in his book "Risk, Uncertainty and Profit."

Two typical situations may be described for the countable risk. For the first – when there is "prior probability", for example, in gambling games, when the probability of dropping the ace is 1/6. For the second, when there is "statistical probability", for example, the probability of a person to live to a certain age. This indicator can be calculated by insurance companies. It is possible to take out insurance rrom the risk of a second example and include insurance premiums in fixed outlays, which are passed on to consumers (Knight F.H., 1985).

In the case with "true uncertainty", due to the lack of any precedent, neither probability nor possible outcome are possible. According to Knight (1985), this uncertainty is peculiar to any capitalist enterprise. "It can not be either insured or capitalized or paid in the form of wages" (Knight F.H., 1985, p.27). According to Knight private factory may exist in the field of production and in the future needs of the customer (Knight F.H., 1985, p.29).

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