This is a question from a layperson about the fundamental concept of hedging, with regards to investing, gambling, and any situation in which hedging is used to manage risk.
I do not understand why hedges are used as a risk management tool. Could the same reduction in risk not usually be achieved by simply betting/investing a smaller amount? I could imagine a situation where hedges would make sense - for example, where there is a minimum bet/investment that one is forced to make. But I get the impression that people use hedges all the time, even when there is the option of simply betting a smaller amount. Is it because risk in investing is measured as a percentage instead of a dollars-and-cents outcome? Or is it irrational, and related to the fact that hedging is simply more exciting than betting less?
In short: Why manage risk by hedging instead of managing risk by simply betting less?