Risk is generally defined as the possibility that something adverse may or may not occur. Thoughtful risk management is essential in personal and business endeavors. From dating to deep-water drilling, one must be cautiously alert to danger. The following comment provides a brief and incomplete educational overview of ten, of many, basic risk management principles. Always consult experienced professionals in specific situations.
Thoughtfully consider these points in a specific situation:
1.Investigate and study the past and the experiences of others, but recognize that there may be new and different present risks.
What events, positive and negative, have occurred in past situations like the one under consideration? What have others done in these circumstances? Due diligence is critical. There is so much readily available information that failing to investigate is inexcusable. "Trust but verify" goes the saying. Yet, a charming psychopath or con artist may sweep away fears and cause one to overlook obvious dangers. Additionally, be alert to the possibility that present risks may be radically different than past risks. For example, the tactics of infrastructure hackers, financial scammers, and personal predators, utilizing modern technology, constantly change. Military leaders are sometimes accused of "fighting the last war."
2.What assumptions underlie our actions, and what risks are anticipated and what risks are unanticipated?
The inability to accurately forecast the precise timing of the occurrence, if ever, of numerous low probability but high impact events (a massive earthquake, the dollar losing all value, being murdered, for example) means that one can only reduce the venerability to them. Additionally, one must realize that there are "unknown unknowns" that are outside of our thinking. It is a good personal and business practice to thoughtfully list the assumptions that underlie our decision making. What will happen if those assumptions prove to be incorrect or conditions change? The "obvious" may not always be the same. Collectively, we are living in a period of rapid change and disruption. Individually, extremely individualistic and narcissistic personalities consider any self-sacrifice laughable. For these individuals, people are to be used and tossed aside. Think. For example, is there an underlying assumption that Pacific Ocean shipping for goods will be available? Is there an assumption that a reliable informant must be a "good guy" and consequently need not be screened for weapons or a suicide bomb? Is there an assumption that church membership means that an individual has good character? Tricksters project images and astutely read their victims.
3.Thought processes concerning risk often involve fallacies.
Numerous studies show that individuals do not accurately perceive risks. Individuals and business leaders may be overconfident, excessively optimistic, and have a number of biases. Biases include a small sample and inexperience bias (not enough information to generalize), confirmation bias (information confirms preexisting beliefs), group thinking (an inability to challenge a dominate opinion), and the "halo effect" (bad things do not happen to good people). Thoughtful self-knowledge of one's limitations is important. The humility to seek expert advice, and to listen, is wise. One way to address this issue is through established objective checklists and protocols. Aircraft pilots have checklists to avoid mistakes. Businesses have management and legal protocols. Perhaps one should also create some personal protocols. An obvious example is not to drink and drive. The risk of harm is too great in a situation in which physical and mental abilities are impaired. What are some behaviors or risks that you personally will avoid?
4.Categorize the risks.
Are they natural (the earthquake), part of an economic or social system that we do not personally control (the dollar collapse), or something we might personally mitigate or influence through careful planning (being murdered). Nature events are somewhat predictable (fault lines in the earth shift) but their occurrence or non-occurrence is outside of our control. "You can't fight Mother Nature," but you can get out of her way or insure against her actions. The same is true of macroeconomic and social events. Individually, thoughtful situational awareness may keep you safe. Learn to be observant of your surroundings and have a plan of action. Trust you gut instincts.
5.Prioritize, as best one can, the likelihood of particular events occurring within each risk category.
Work down from highest likelihood to the lowest. Does an event occur with sufficient frequency (for example, the nonpayment of consumer debt) that it may be factored into the cost of doing business? Granting credit may or may not generate sufficient additional sales to more than offset bad debt losses. An old joke involves the loss of money on every sale but making up the loss through volume. In personal relationships, pay attention if and when friends and family say that an individual is "trouble." Past personal history is a good indicator of likely future behavior. For example, it is obvious that if an individual has engaged in extramarital affairs with others, or is currently doing so with you, then you are likely to be victimized as well. Be very cautious when a romantic interest states "We have an open marriage." Triangles may produce broken hearts and murder. Nevertheless, a common delusional though is that "This time will be different."
6.How much loss is associated with each listed event?
What type loss is involved: economic, emotional or physical, or a pesky, but comparatively trivial, annoying loss of time and energy. Is one able to absorb the loss or should the loss be transferred or shared or simply avoided outright? Is the loss so great, the potential reward so small, and the probability sufficiently known that one should not undertake the contemplated action? For example, perhaps one should not visit certain nations. Humanitarian intentions do not prevent tragedies. Some actions are best not undertaken. There is prudent risk taking (entrepreneurship, rightly done) and foolish risk taking (isolating oneself in a vulnerable situation). However, deeply held political, patriotic or religious beliefs or humanitarian concerns may cause one to act out of principle in a way that is contrary to what would be commonly believed to be "rational" self-interest. That is an acceptable motivation if one is acting with full factual awareness and this course of action does not harm others. If one has family or dependents, their needs must be considered before acting.
7.What interplay of factors (especially emotional) are causing one ignore a potential risk?
Are there misplaced or misaligned priorities? For example, flying a small aircraft into a thunderstorm in order to arrive at a scheduled meeting is sufficiently common to be called "get-there-itis." Is ego involved? Is a misguided sense of superiority and invulnerability causing one to engage in risky economic or personal behaviors? Individuals who believe their "systems" will "beat the market" or leaders who travel without bodyguards may suffer these delusions. Are emotional needs to be loved, appreciated, and admired involved? Tragic affairs and doomed (potentially dangerous) romances may result from these needs. Are the potential rewards so great, and the ability to recover from the possible loss sufficiently foreseeable, that one should act? This considers a limited window of opportunity. For example, students may ask a teacher to provide "extra credit" work in order to improve a low grade at the end of a course. This request has a potentially high reward and a relatively low risk if rejected. The old saying in many situations is "It never hurts to ask."
8.Be cautious when mathematically calculating risk.
There is a form of business risk calculation that multiplies the dollar amount of the loss times the percentage probability of it occurring. The underlying presumption is that there is a sliding scale of potential damage as might occur, for example, when an auto suffers damage in a "fender bender." However, many events may be binary in nature. They either do not occur at all ($0 loss) or they fully occur ($full amount loss). What type event is being considered? While actuarial science has great predictive value when addressing large numbers of similar events (mortality tables, for example), sometimes there is too small a sample, or there may be unrecognized and unconsidered factors involved in producing the event. One must be careful not to inappropriately ascribe mathematical certainty to a risk calculation. An old saying states: "Garbage in, garbage out."
9.Distinguish risk management and risk prevention.
Which is appropriate in this specific situation? Diversifying an investment portfolio is a common risk management strategy. Risk prevention may be not acting at all, such as the proverbial fruit jar full of coins buried in the back yard. Many commentators discussing both personal life and business activity suggest a bias for action. "Faint heart never won fair lady." However, an equal amount of popular wisdom suggests prudence. "Pigs get fat and hogs get slaughtered." "He who fights and runs away, lives to fight another day." One must be thoughtful.
10.Risk spreading and risk transfer, easily accomplished in business, is difficult in personal relationships.
Traditional business risk management involves risk spreading through techniques such as insurance, bonding, cosigners, collateral, and diversification. The risk remains but there are more potential sources of recovery. U.S. government financial guarantees are the closest to no risk that a business may achieve. However, personal risks to emotional and physical wellbeing are not always so easily transferred. Life and health insurance may replace lost income, pay medical expenses, and support dependents. In other areas, personal emotional support systems of family and friends are crucial. Abusers and predators isolate their victims. The horizons of victims narrow and they may empathize with the abuser (Stockholm syndrome) or somehow think that they deserve the abuse for being "bad." Intervention in a cycle of domestic violence is difficult. A threat of serious bodily injury or death requires a major disruption in routine that some individuals, tragically, are unable to undertake.
There are numerous barriers to appropriate risk management. Within a business organization contrarian opinions may be disrespected, the boss may "kill the messenger" who brings bad news, and there may be productivity and scheduling pressures that cause corners to be cut. In personal relationships it is said that "love is blind;" there is a mistaken belief that one person can change another person's personality through love or after marriage; and there is a tendency to disregard negative signals and hints of bad things to come.
Catastrophes frequently involve a sequence of small events that collectively produce a major event. Often there are several opportunities to "get off the train" before the crash. We need that insight as events are unfolding. Emotion may override rational thought as road rage illustrates.
The well-known Serenity Prayer of Reinhold Niebuhr, popular in twelve-step programs, states: "God, grant me the serenity to accept the things I cannot change, Courage to change the things I can, And wisdom to know the difference." Life is full of risk. Some risks cannot be mitigated and others can be mitigated. May we be both wise and serene when assessing risks. Wisdom is always seeking appropriate professional advice. Serenity is living life fully without fear.