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A means of dealing with a risk, situation or unwanted outcome. These fall into a few categories:
- Risk management: Practical things you can do each day to minimise the probability of unwanted events which could be catastrophic, coming close to happening in the first place: Hire experts. Don’t do risky stuff. Avoid concave risks. Monitor your clients. Be watchful.
- Limits: Mines, defences and bear-traps you can set to scare off bad things if they do come to close: Margin, security, risk limits
- Enforcement: Airbags, roll-bars, inflatable life-rafts and avalanche kits that kick in once bad things have happened: Close-out rights, events of default, indemnities.
- Exoneration: means by which you, personally, avoid being blamed for things that did happen and were catastrophic. Disclaimers, disclosures, weasel wording.
The running cost of exercising coping strategies is inversely proportional to their usefulness. Hiring expert managers to monitor and avoid risk is a full-time, up-front cost. Limits and enforcement tend to be costly to implement. Exoneration costs nothing day-to-day until after the fact, at which point it is both useless and ineffective. If the loss threshold is high enough, you will get fired.