Taming the Dragon: Risk Demystified

As humans, we tend to fear the unknown. If a person or situation is familiar, we know whether or not they represent a threat. In many cases, a known threat is more bearable than uncertainty, because at least we can prepare our defenses.

For most people, risk is a vague and abstract concept. For some it carries an air of excitement and adventure, but for the majority it invokes fear and stops them from doing things they would dearly love to do. This has inspired a range of ill-conceived slogans such as, "Feel the fear and do it anyway!" (Really? Perhaps we could have a conversation about what "it" is first...)

But rather than trivializing and glossing over risk, what if we could understand it better, and develop a level of mastery around managing it in our lives? What if we understood risk so intimately that we could approach any situation or opportunity with an open mind, and make an informed choice about whether it matched our personal risk appetite?

Every industry has some kind of risk management system in place. It may be as simple as an insurance policy, or as complex as a holistic system that is integrated into the very fabric of an organization's culture. We can learn from these systems and use the very same principles to work in our lives, to allow us to see things as they truly are and make better decisions. Whether you see yourself as too risk-averse, or you've been told you're too much of a daredevil, these principles can open up a new world of possibility for you.

Over a decade working in explosives chemistry and marketing provided me with a unique perspective on risk and how it applies to the real world. If you take a simplistic viewpoint, pretty much everything we did in the course of that business had the potential to kill someone. But businesses that kill people routinely don't stay in business for long, so we had to develop ways that fundamentally "dangerous" materials could be used safely. That meant we had to understand what the risks really were (beyond the basic "killing people"), and how to manage them in an environment that we had little direct control over.

Risk can be broken down into two fundamental elements: consequence and likelihood.

This is the aspect of risk that most of us gravitate towards, and is often confused with the concept of risk itself. It refers to the negative impact that would occur if something went wrong. When considering this question, some take it to an extreme by catastrophizing - imagining an terrible chain of events that has no basis in reality (a common example is imagining that making a mistake at work will lead to you being fired, and you won't be able to get another job, and you will end up on the streets).

Whether we go to this extreme or not, many of us start and finish our consideration of risk with what we consider to be the worst possible outcome. For example, "If I ask my boss for a raise, they will think badly of me and not only say no, but overlook me next time an opportunity comes up". So we don't ask for the raise. Granted, this is one way things could turn out - but it's not the only way.

So what other outcomes could we have? Our boss could say yes with no questions asked, they could tell us what we need to do to be eligible for one, they could say no but admire our initiative, or provide any number of other responses. When we assess risk, we focus on the possible negative outcomes only which helps keep it manageable.

Each negative outcome will have a certain consequence, or impact. We rate these based on how bad they are:

  • Insignificant: No big deal.
  • Noticeable: Not great, but you'll recover quickly (personal embarrassment usually falls into this category)
  • Serious: Has a negative impact on your (or others') life.
  • Very Serious: Has a very negative, lasting impact on your (or others') life.
  • Catastrophic: An absolutely unacceptable outcome.

Something to notice about these categories is that they are subjective. This is not the case if you are working with explosives - there are ways to quantify the consequences such as financial impact, environmental impact and number of injuries. When you apply this in your life however, the definition of each category is completely up to you. This is one of the more challenging parts of assessing risk, because you have to really think about what constitutes each level.

Once you understand that there are a number of possible outcomes, and how severe they are in comparison to each other, we come to the second element of risk.

The often ignored side of the risk equation, likelihood is simply how likely it is that a certain outcome will happen. We tend to overlook likelihood for one very good reason: it complicates things. If we start thinking about likelihood, then we have to acknowledge that there is more than one possible outcome (usually there are too many to realistically consider). If we acknowledge this, then we have to consider those outcomes against one another, and that seems like a lot of work. But honestly, what is more work - spending a few hours using a best-practice tool to objectively consider what's really at stake, or spending countless hours agonizing over unknowns with no basis in reality?

Just like consequence, likelihood has five different categories. And just like consequence, these categories are subjective, at least to a degree. The important things to keep in mind when assigning a likelihood to each consequence are (1) to think about what evidence you have that supports your choice, and (2) to be really honest with yourself - especially if you are prone to catastrophizing! The categories are:

  • Extremely Unlikely: For those consequences that you know are irrational but you just can't get out of your head.
  • Unlikely: It probably won't happen, but it's not quite irrational.
  • Possible: It could happen, but don't know any specific examples where it has.
  • Probable: It has been known to happen, but it's not a given that the same thing will happen in this case.
  • Will happen: You have very good information that tells you this will definitely happen.

While it is true that considering likelihood makes our decision process more involved than usual, it doesn't make it nearly as complicated as most people assume. It only seems complicated because most people have never learned how to assess and manage risk. Once you learn this relatively simple set of skills, you are in a position to approach any opportunity with an open mind, and make decisions that are right for you.

Bringing it Together
When we combine consequence and likelihood, we get risk. The easiest way to combine them is on a table like the one shown below:


Your personal risk assessment table may look slightly different, but this is a great start. If you consider one of your possible outcomes, decide what level of consequence and likelihood it has, and find that on the table, you can see just how significant the risk is. If it's green, no sweat. Orange, think about whether you're comfortable, and red means you should stop and either put some mitigation measures in place, or take a different course of action.

In the coming weeks, I will be exploring how to apply risk assessment in our lives to help in decision making.

What is your perception of risk? Has it changed since reading this article?

This article first appeared on Light Yourself Up.