Risk theory of profit



Risk theory of profit

This theory is developed by Hawley. According to this theory, profit is reward for taking risk involved in the business. The business that involves high risk gives more profit and vice versa. Profit is directly related to risk

Symbolically

Profit ∞ risk

If risk ↑ profit ↑

If risk ↓ profit ↓

According to this theory, any type of risk gives rise to profit regardless the risk is avoidable or not.

 

 

Criticisms

  1. Not direct relation between profit and risk: Profit is not directly related to risk. If the business involves high risk, there is more probability of failure and loss rather than profit
  2. Profit is reward for avoidance of risk: Profits earned only if risk is successfully avoided using skills, education, knowledge, experiences and so on. It is not earned mere taking risk.
  3. Risk is not factor of production: According to this theory, risk seems to be the factor of production but factor of production is organization not risk.
  4. Reward for all things performed by organization: Organization earns profit not only taking risk but for all things it performs. They are innovation, effective combination of inputs, use of skills knowledge etc and bargaining power.
  5. Only the foreseeable risk gives rise to profit: All risks don’t give rise to profit. Only the foreseeable risk or non insurable risk gives rise to profit.