Michael D. Moberly July 4, 2015 ‘A long form blog where attention span really matters’!
It should come as no surprise that the way one perceives risk in general, and business risk in particular, influence how, why, and when decisions about managing (business) risk are made.
To be sure, identifying, measuring, and assessing risk are collectively important, as is meaningfulness, specificity, and perhaps most importantly in my view, commonality of (risk) understanding that fosters consensus necessary for decision makers to actually undertake appropriate (risk prevention, mitigation, or management) initiatives.
Again, to no readers’ surprise, an important aspect of recognizing (business) risk today is that it (risk) evolves over time, particularly in terms of how it is characterized, its drivers, and its potential criticality. Countless experiences of my own however, suggest there remain a significant percentage of business decision makers who ‘react’ to risk. That is, their recognition of business risk tends to be either relatively dismissive or, doing (only) what’s necessary to try to favorably restructure the odds that risk will materialize, i.e., vulnerability, probability, and criticality but, absent characterization of risk in a continuum context.
In other words, numerous business decision makers I have met perceive risk through rather fatalistic lens, i.e., assumption and acceptance that adversity (business risk) is generally present or permanent fixtures, conveying little confidence in prevention, mitigation, or management initiatives. Preferably there is change on the horizon though, as more sophisticated risk or its unfortunate counterpart ‘threat’ calculations include more meaningful and relevant probabilities (vulnerabilities, criticalities) which in turn elevate business decision makers’ understanding and fiscal comfort to address risk accordingly.
I envision with greater recognition of the irreversible prevalence – dominance of intangible asset intensive and dependant businesses and markets and the more unique and stealthy risks associated with intangibles will influence business decision makers’ to re-think risk management initiatives and necessities.
Fate and divine providence…
For long periods of time however, events and activities perceived as carrying a probability for adverse consequences, i.e., risk, were often attributed to divine providence or to the supernatural.
During the early periods, prayer and sacrifice were the prevalent means for mitigating a broad range of risks, as was the acceptance of whatever fate that followed. Sacrifice particularly was presumed to appease the spirits (gods) that could impose – bring about adverse outcomes. If however, there was no supernatural spirit or ‘god’ intervention, a business owner could anticipate incurring some level of suffering to their business or person. Presumably, if the ‘gods’ did intervene, a business owner could expect a favorable outcome.
Consequently, it was deemed unnecessary to measure risk in a conventional context due to peoples’ strong beliefs that all events, activities, and outcomes were pre-destined, i.e., they were driven by super natural forces beyond one’s control. ( The above was heavily adapted by Mr. Moberly from Dr. Aswath Damodaran’s ‘Risk Management: A Corporate Governance Manual’, Chapter 4, Stern School of Business, NYU)
Difficult to differentiate risk…
Why do people or businesses engage in risk, and why are significant percentages of people – business decision makers relatively ineffective at assessing risks which they elect to engage?
For one, I suspect there are numerous readers of this blog who have experienced challenges insofar as articulating risk to c-suite colleagues in a manner they understand which allows them to differentiate the act of engaging in circumstances and/or transactions laden with risk relative to any presumed (projected) benefits of engaging in those risks.
Their rationale may, at least in part, be characterized as an anticipated emotional – psychological ‘buzz’ by engaging in behaviors and activities in which risks are obvious and known. For example, one may experience a ‘sense of affirmative relief’ after engaging in certain high risk behaviors, i.e., seeing one’s parachute canopy being fully deployed, or successfully negotiating highway curves while driving at a high rate of speed in a new automobile, or achieving – surpassing projected returns from a risky investment or transaction.
Most of us engage – face risk everyday…
Most of us recognize the reality that we engage – face risk each day, but we wish not to become paralyzed or unnecessarily encumbered, so we proceed. That said, large percentages of us remain inclined to couch – apply the term ‘risk’ in the context of activities – behaviors in which a risk or adversity can be the outcome, particularly when our elective decision to engage that risk is unresponsive to prevention, mitigation, or management strategies we may want to deploy, but materializes anyway.
Still, there are, to be sure, some business decision-makers who do not recognize there is generally some element of risk in most every action – inaction they take. Not infrequently, decision makers elect to dismiss – write off such realities because they assume a sufficient level of (risk) control and oversight can be sustained throughout the life – value cycle of the risk itself.
I am reminded though of the risk of becoming a victim to homicide in the U.S. On the one hand should we consider only the numerical probability, i.e., x per 100,000 population, this may seem as acceptable odds particularly if we refrain from entering areas where the highest percentage of homicides are reported. On the other hand, if we consider becoming a victim of homicide on the basis of whom our murderer is likely to be, i.e., spouse, relative, loved one, or close friend, such knowledge may influence us to re-frame our choices about engaging is certain risk producing behaviors with those individuals.
There are chronic risks and acute risks…
Examples of chronic risks include such things as consistent smoking of cigarettes or eating food with high levels of trans fats known to produce adverse health. As chronic risks, individuals so engaged, may not seem to give a great deal of consideration to the harm they are producing to their body. Such personal dismissiveness is frequently linked to their perception that continuing to engage in such risky food selection-consumption behaviors and the potential adverse affects those habits produce in their bodies and manifest as physical diseases may materialize over time – in the distant future, at which point the risk taker assumes they can be reversed by surgery or managed, mitigated, or controlled by ever sophisticated medical intervention. In the interim, acknowledged assumption – continuation of those risky behaviors are likely to continue.
Most are inclined to approach what they perceive as small risks, particularly risks which spread over a period of time before they begin to experience initial adverse reactions, i.e., the materialization a the flu attributed to not getting a flu vaccination.
Indeed, it would be interesting if we could construct a cigarette that would cause immediate adverse (physiological) reactions to smokers versus risks that manifest overtime and which many no doubt rationalize and assume they have some control over, i.e., can cease at will and reverse any previous adverse harm.
Examples of acute risks, on the other hand, include rather obvious high risk activities such as sport parachuting, scuba diving, running a marathon, or becoming a ‘wing suitor’ that jumps off high elevations. For each activity deemed acute risks, there is data that describes such risks in probabilities, e.g. one in one million probability if we engaged in one of these activities, we may experience serious injury or death. (BBC World Service, ‘The Why Factor’ hosted by Mike Williams program titled ‘why people take risks’, June, 23, 2015)
Risk media paradox…
We are in the midst of a risk – media paradox. For example, commercial air travel has become an increasingly safe mode of travel. However, as air travel safety increases, i.e., passenger air miles without crashes, there tends to be greater media coverage when a airplane catastrophe does occur. Thus, the more difficult it becomes to measure – assess human assessment of real risk
Ultimately, to effectively mitigate risk, one needs to genuinely understand the risk they or others are engaging. But risk understanding – assessment does not stop there. One also needs to understand (identify – assess) each component part to the risk, that is, the variables that can emerge once a risk activity or task is undertaken and should a risk materialize, will it alter the risks’ initial calculations, i.e., mitigation, prevention, management, etc.
Understanding risk also includes identifying and factoring any systemic risks present which could exacerbate the risk activity – behavior to the point it becomes multiples of the assessment of the initial vulnerabilities – probabilities of acceptable ranges of risk.
Receptivity for engaging in calculated risks…
Of course, there is a growing percentage of individuals who are receptive to engaging in what they perceive – assume to be ‘calculated risks’ an acceptable portion of which presumably can be controlled and mitigated through preparation, practice, and exceptional equipment.
When one does incur an adverse outcome as a result of engaging in a particular risky activity where reliance on the proper functioning of equipment, machines, or processes to achieve a successful (non-injurious) outcome, but there are equipment – process failures, i.e., parachute canopy not deploying, one’s concerns for their safety are likely to heighten substantially. No ‘rocket science’ here!
But, at what point do risk probabilities actually rise to the level of getting decision maker’s ‘go – no go’ attention? Generally, it’s very challenging for people to grasp risks when they are couched in say 4 chances per million contexts.
But, when risk-probability calculations lie in the 1 or 2 per one hundred thousand or lest, at this point, decision makers – risk takers often start to take more notice and may even back away from an activity or transaction that carries such success – failure calculations. Thus, for people engaging in acute categories of risk, there are brief periods of time when the risk taker – business decision maker retains the ‘go – no go’ option.
People tend to perceive – characterize risk on very emotional scales…
It’s probably far too much to assume people should assess each and every risk they engage. But, many argue that humans are inclined to approach most risk on very emotional levels, e.g., citizen willingness to engage in commercial flying following the U.S. terrorist attacks of 911 reduced significantly
So, as people act emotionally and perhaps quite rationally to such events when they sense too much risk to fly commercially, they revert to alternative modes of travel, i.e., driving their cars. Very respectfully, while the U.S. lost 3500+ citizens to the 911 terrorist attacks, the U.S. lost an additional 1500+ above what was forecasted to automobile accidents in the year following 911, but with no comparative, emotional or otherwise, adverse reaction. (The above was heavily adapted by Michael D. Moberly from BBC’s ‘The Why Factor’, Dr Mike Aitken, Lecturer, Experimental Psychology, Institute of Psychiatry. Psychology and Neuroscience. King’s College London. Professor David Spiegelhalter, Professor of the Understanding of Risk Statistical Laboratory, Centre for Mathematical Sciences, Cambridge University worked with BBC Lab UK to create the Big Risk Test, a mass participation survey into why some people are risk-takers and other are risk averse.)