Sunday, February 10, 2008

Do You Hedge Your Bets?

Last year as baseball teams were starting to report for spring training, a furniture store in Massachusetts was developing their marketing plan for a tie-in with the widespread enthusiasm for the Red Sox. They came up with a promotion linked to how well the Red Sox would do during the new baseball season. The furniture store offered every customer who bought furniture during a certain spring period a complete refund (Their furniture purchase would be free.) if the Red Sox won the World Series. The odds against such a win were huge, so it was highly unlikely that they would ever have to pay off on this offer. However, they were smart enough to hedge their bet by taking out an insurance policy against this possibility. As we all know, the Red Sox won the World Series (Yea!), and the furniture store had something like 30,000 purchases which would have to be refunded. However, because they had hedged their bets with the insurance policy, the insurance company paid for those refunds. The store not only avoided the repayment by hedging their bet, but due to the popularity of the promotion they sold far more furniture that would have been the case without this marketing plan. It is not always possible to make a risky decision and still protect yourself against its possible consequences, but you should study all risk aspects to see if there is a practical way to offset at least part of your risk exposure before you make a commitment.

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