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So you think you are risk averse?

Cliff walk

A walk along the cliff – look at the view!

A thought piece by Insync Chief Executive Officer, Sean Coady.

You can’t say you are a risk-averse organisation if you don’t know your risk exposure.

You can’t manage what you don’t measure – most people accept that. Yet many businesses won’t put in the effort to see how close to the edge they are walking, how big the drop might be, how solid the ground is, and what the weather forecast might be. But they love the view!

Who can blame them? We, humans, are great at seeing what we want to see and rationalising or ignoring what spoils the view. I mean, after all, the view is real. You can see it there in front of you. That great big horizon is full of beauty and possibility.

Now, about that other stuff. Yes, you might think, there is some bad stuff that could happen, but it might not too. I mean, nothing bad has happened yet.

Storm with calm

Why risk management is important

It’s a great feeling when things are going well. Maybe a few speed bumps but all in all – things are ok. Why waste time and money you might think on identifying, measuring and assessing all those pesky risks that might never happen?

It’s at this point that a few home truths might be needed. But first, well done for having that unspoilt view. You are experiencing one of the many possible futures that your business could have realised when it imagined its future, say 3 years ago. Of all the things that could have happened, this is the reality that did. So, there is truth in the statement that much of the risk management work you could have done would likely have been unnecessary.

However, look around and see other organisations that had a different reality. Some of it is visible and some is not. Some businesses are gone or dying, and others are roaring. You certainly did better than many but did you do as well as some? And, critically, which of those did measure and manage their risks and which did not? Who got lucky?

The harsh truth is that because risk is forward-looking, and good risk management only helps you improve the chance of achieving your objectives (by reducing uncertainty), even great risk management does not guarantee an unspoilt view. Poor risk management can, through the uncertainty of luck give you a better outcome – but do you want to rely on luck or improve your odds by measuring and managing?

Control risk managment

Good risk management will win in the end

In other words, do you want to be more risk-averse by knowing your exposure and dealing with it, than pretending you are risk-averse by confusing the avoidance of measurement with the avoidance of risk? Over the long term, history has proven time and again that despite the randomness of luck in the distribution of possible outcomes, good risk management wins in the end [1].

This does not make the message any easier of course. Back to the human bit – there are so many biases that work against our decision to invest in better risk management. I’m amazed so many people do it at all.

We attribute skill and leadership to outcomes more than we should, we think risks were not triggered because of something we did or didn’t do, rather than understand what else is going on, we trade-off the investment cost in risk systems with our innate internal risk ‘spidey-sense’ and believe risk systems simply capture our head and heart risk smarts.

There is so much research around cognitive bias and decision making that any organisation that fails to understand how people identify, measure, assess and manage risk through meaningful ‘decision quality’ processes – are doing a major disservice to their stakeholders.

“You need to enjoy the view, but do so knowing you measured and managed some of the biggest uncertainties that could have spoilt your view, and had a reasonable amount of luck in the process as well”. – Sean Coady

You don’t need armies of expensive consultants to help you here – but you do need clear objectives and a risk management process though – one that is ‘fit for purpose’.

Find more information here or feel free to ask for our view.

  • Fooled by Randomness – The Hidden Role of Chance in Life and in the Markets” by Nassim Taleb, Penguin 2004;
  • Luck – What It Means And Why It Matters” by Ed Smith, Bloomsbury, 2012;
  • The Innovator’s Dilemma – When New Technologies Cause Great Firms To Fail” by Clayton M. Christensen, HBR Press, 2016;
  • Risk / Reward” by Anne Kreamer, Random House, 2015;
  • Risk Savvy – How to Make Good Decisions” by Gerd Gigerenzer, Penguin, 2014;
  • Nudge – Improving decisions about health, wealth and happiness” by Richard H. Thaler & Cass R. Sunstein, Penguin, 2009.

Sean Coady

Chief Executive Officer

As a qualified lawyer and passionate technologist, Sean loves to work with clients to help them understand, articulate and reimagine their most important business challenges. He has focused on risk management and decision quality over the last few years and in this 4IR spends as much time helping clients think about emerging risk and opportunity and how they best design their risk management, compliance and assurance capabilities to meet existing and evolving expectations.

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