Hedging means taking additional risks that offset other risks, so that if the downside impact of one risk occurs, it is (in theory) balanced by the upside impact of the other risk.
An example would be betting an equal sum on both sides in a sporting fixture - whatever the outcome, you cannot lose. In investment or business, a 'perfect' hedge (one where the different outcomes are perfectly balanced) is practically impossible. A contractor can partially hedge his material cost prices of his contract with an advance order with the manufacturer for future delivery.
Hedging isn'tjust an approach to business or investment risk. We engage in many trivial hedging behaviours all the time in our everyday lives - in any situation where we wish to avoid the risk of commitment. When we hedge in everyday life, we set up alternatives for ourselves that will minimise the negative impact on us if things don't work out. Consider the planning of a Friday night out. We might make tentative plans to go out with one group of friends, but remain open to other offers. After all, a better offer might come along - with a higher probability of positive impact (more enjoyment). We are 'hedging our bets'.
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