Tag Archives: what is risk management

It’s Oxymoron– Managing Risk and Uncertainty: An Organization Without Risk is Organization Stuck in a Rut…

Risk is a basic ingredient for innovation… Risk implies uncertainty and an inability to fully control the outcomes or consequences of an event… It’s an uncertain world and organizations must accept the fact that they operate in a world of unknowable risk… According to Donald J. Riggin; regardless of the nature of risk it’s impossible to manage; in fact, the expression ‘risk management’ is an oxymoron, because if risk was manageable it would no longer be considered risk…

However, understanding risks is a critical step to knowing how to deal it… According to Steve Tobak; the notion that– Big Risk beget Big Reward is nonsense… Whether it’s the world’s top– hedge fund traders, venture capitalists, real estate tycoons… these billionaire insiders look for opportunities that provide asymmetrical risk/reward… This is fancy way of saying that ‘reward’ is drastically disproportionate to ‘risk’…

In the article Decision-Making Under Risk and Uncertainty by Samia Rekhi writes: The starting point in decision-making is the distinction among three different states of a decision environments: certainty, risk, uncertainty. The distinction is drawn on the basis of the degree of knowledge or information possessed by the decision-maker… Certainty can be characterized as a state in which the decision-maker possesses complete and perfect knowledge regarding the impact of all of the available alternatives…

Often when making decisions the two terms ‘risk’ and ‘uncertainty’ are used synonymous… Both imply ‘lack of certainty’, but there is a difference between the two concepts; risk is characterized as a state in which decision-makers have imperfect knowledge– incomplete information but enough to assign a probability estimate to possible outcomes of a decision…

These estimates may be subjective judgments or they may be derived mathematically from a probability distribution… Uncertainty is a state in which the decision-maker does not have enough information to make a subjective probability assessments… It was Frank Knight who first drew a distinction between risk and uncertainty; risk is objective, whereas uncertainty is subjective… risk can be quantified, whereas uncertainty cannot… Uncertainty implies that probabilities of various outcomes are unknown and cannot be estimated… It’s largely because of these two characteristics that decision-making, in risk environment, involves primarily subjective judgment…

All business decision-making have common characteristics. The traditional approach requires precise information and thus often leads management to underestimate uncertainty and risk factors, which can be downright dangerous for an organization… According to Hugh G. Courtney, Jane Kirkland, and S. Patrick Viguer; making sound decisions under uncertainty requires an approach that avoids the dangerous binary view of risk…

Available relevant business decision information tends to fall into two categories… First, it’s often possible to identify clear trends, such as; market demographics… Second, it’s also possible to identify not so clear trends, such as; customer psychographics…The uncertainty or risk factors that remains tend to fall into one of four broad levels …

  • Level one: Clear enough future: The uncertainty is irrelevant and risk factors are relatively low for making decisions… hence, management can make reasonable precise decisions… Also management can use traditional information gathering, such as; market research, analyses of competitor costs and capacity, value chain analysis, Michael Porter’s five-forces framework, and so on…
  • Level two: Alternative futures: The future can be described as one of a few discrete scenarios… Although probability analysis is useful it cannot precisely identify which outcome is most likely to occur…
  • Level three: Range of futures: A range of potential futures can be identified… A limited number of key variables define the range and most likely outcome can lie anywhere within the range. There are no natural discrete scenarios for the outcome. Organizations in emerging industries or entering new geographic markets often face this uncertainty…
  • Level four: True ambiguity: A number uncertainties and risk factors create an environment that is virtually impossible to predict. And it’s impossible to identify a range of potential outcomes, let alone scenarios within a range. It might not even be possible to identify, much less predict, all the relevant variables that define the future. This situation is rare– black swan events– although they do exist.

Knowing how to assess risk is an organizational competency that must be fostered for long-term sustainability… To do so requires new language and tools to facilitate effective decision-making and decisive action. According to Ralph Jacobson; in developing business strategy it’s important to determine an organization’s ‘risk appetite’, i.e.; how much risk it’s willing, and can afford, to accept… This involves identifying and understanding the scope of risk required in a decision. Typically there are four options– avoid it, accept it, transfer it, share it…

But often decision-makers are confronted with unknowns– these are ‘unknown unknowns’… These unknowns are things that haven’t even been thought of as possible– black swan occurrence– rare but they do pop-up every now and then… situations where management tries to understand more about what they don’t know, than what you do know... These are precisely situations where innovation thrives– it’s when innovators push the edges, challenge status quo, break boundaries in the realm of uncertainty and risk taking. According to Dan Gregory and Kieran Flanagan; uncertainty suggests taking risks, going beyond the known and knowable– thinking scared, thinking stupid, thinking different…

Thinking scared is simply understanding that fear drives all decision-making– it might be the fear of taking action or fear of not taking action. These twin forces often govern negative behavior… but they can also be marshaled and used for positive motivation– the fear of missing out is perhaps most potent motivation in many organization. It’s human nature to resist change and this same nature can be used to drive innovation that embraces risk and uncertainty, and thinks beyond scared, thinks beyond stupid, thinks beyond different…