Is risk bad for business? In the uncertain, complex and volatile environment of 2005, it no doubt seems to many executives to be so. Risk is something to be managed, reduced, hedged or sold to others. But it is worth recalling that the original concept of risk, derived from early European seafaring adventurism, contained a powerful sense of opportunity and reward as well as downside and danger.

We believe that, in the future, winning businesses will be those that are best able to balance coping strategies, which are defensive and focused on avoiding downside risks, with an increasing mix of exploitation and exploration strategies, which embrace risk and make the most of the opportunities it presents. This will require more than just continuous improvement in traditional risk management tools - it will also involve a shift in mindset and focus.

There are good reasons why executives tend to think of risk as something to be avoided. One is simply the hard-wired human psychology of loss aversion - for most people, it hurts more to be at risk of losing $10 than it feels good to have a chance to gain an equivalent amount.

Another is the leftover experience of the 1990s - in a highly permissive and opportunity-rich business environment, where it was remarkably hard to fail, a smart and simple risk strategy consisted simply of protecting against catastrophic downsides and then letting the engine run.

A third reason is the extraordinary innovation in risk management tools, which allow sophisticated hedging, repackaging and pricing of risk within increasingly liquid marketplaces. These tools are important - but they are unlikely to confer much in the way of sustainable advantage over the longer term. A business that gives in to loss-aversion psychology, sells off its risk to others and simply lets the engine run, will in the future most probably be described by one word: unprofitable.

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