Risks – Are Not Toys For Adults
Author: Olga Pestretsova-Blotska, Executive Officer of consulting company “Center of Business Technologies TOT”, PhD in Business Economics
Risk management in the VUCA world (VUCA – volatility, uncertainty, complexity, ambiguity) becomes one of the basic goals of a company. The capability to manage risk can be confidently attributed to the general corporate group in competency models. Risk management under uncertainty is a combination of strategic and operational levels of decision making, integration of mathematics, logic, psychology and intuition.
Contemporary challenges show that those will win and become efficient who are able to combine intuition and logic in their approaches and decisions.
Risks are not a unique business phenomenon. It seems that the risk has always been since the moment when a man realized himself separated from nature. In the environment full of dangers to life a person has not only to survive, but also to get food and to provide the continuation of human kind. This assumption arises from origin of word “risk” from the old Italian and ancient Greek word «rizikon» which means “a rock” or “to dare”. At one time or another, having come out of the natural cradle young humanity began to realize that life was a constant struggle with obstacles, dangers and threats. Made a step – took a risk. Even worse, did not make a step – took a risk anyway. When people started not only to explore the nature, but also to make it actively work for them – the number of risks dramatically increased as the consequences of such activities.
People began to dream that it would be very useful to have a time machine. In that case, knowing the future and making every step today, the one could exactly know where to put some grass for a soft landing. If the future is determined – then there is no risk anymore. In another way: there is no future – so there is no risk. Thus, the sources of emerging risks are patterns of development, made by a certain person decisions and simple randomness.
If present and future had the only option to act in the unique way – there would be significantly fewer risks. It turns out, that when everything is decided outside and a person’s path of movement is surrounded with the iron fence and the right direction is pointed – the one can go ahead and have nothing to fear. Friends behind will push and the ones ahead will slow down helping not to stray. Like other people. No options means no risks. Everybody is quiet when it is nothing to do and nothing to want to. There is no willed decision – there is no risk.
Here it is the paradise without risk: there is no future, there are no options, there are no person’s decisions either. But …. – this is not a life. If we were born, we had already risked anyway. And all our life, every step we will choose one of two risks that we like more.
As we can see, the difference in approaches to definitions generates further distinction into ways of risk identification and tools of risk management. The questions of the risks sources and methods of their managing had being solved not only by scientists and other mathematicians – Pascal, Fermat, Leibniz, and Bernoulli. But also by many individuals who, for example, stand near bookmaker or near the slot machine or a regular visitor of elite casino. And, of course, normal, professional and rational businessmen do a lot to study and manage risks. The complexity of risks is defined with situation, personal attitude and knowledge and with tools. These three basic elements can be used for building a matrix of risk identification for main business arias and project management.
When we talk about risk, the one can be a fatalist, a pessimist, a fanatic or a pragmatic. Each person has its own “personal” attitude to this phenomenon. When making decisions people create the picture of the situation in the form of a list of features or factors (size of win or loss, probability of loss, level of risk) and size of effects after exposure to the factors. This is in an ideal world. In real life we simplify the situation, ignore minor in our view factors, simplify the problem of choice and reduce our wishes (“I have only one way out …” or “There is nothing left to do but to…”), attache greater importance to losses than winnings, etc. In the book “Judgment Under Uncertainty: Heuristics and Biases” the authors D. Kahneman and A. Tversky consider a number of “traps” in decision-making process through which we can immerse ourselves in a situation of additional risk.
This attitude today determines our actions and decisions related to the future both – our private and professional, connected to business.
Сompanies have their own classification in relation to risks: ostrich, owl, dodo and lemming. This classification origins from the coordinate system “attitude to risk” / “risk management”.
It is unlikely that the company wants to be a “dodo” – an ancient extinct bird that was unqualified in managing risks and aimed to avoid risks. It is also very inefficient and unqualified to manage risks and to seek them constantly. Then the company is like a “lemming” falling down into the abyss.
It becomes clear that companies have limited choice – a projective attitude to risk and a flexible design of risk management. In any case, both the ostrich strategy and the owl strategy involve risks study.
Of course, there are ways of assessment both private attitude to risk and corporate. They allow to analyze the most common scenarios and behavioral strategies to see on which side – the “light side” or the “dark side” – we most likely stand to avoid being “fooled by randomness”(“Fooled by Randomness” by Nassim Taleb, 2002).
Even if all the trends and patterns reflect the existence of «white swans» only. Remember that in the future there are always options. And the miracle is possible. And the prince on a white horse is as much possible as the black swan on the pond (“Black Swan”, second book of Nassim Taleb published in 2006).
Besides the two “favorite” for many people risk management techniques (“accept” and “avoid”) the range of possible approaches is much wider. For different areas of the company implementing “intuitive & logic” approach let analyze alternative scenarios.
Thus, considering the decision making process comprehensively, identifying existing factors of impact, possible action options and further consequences, we can get a multifaceted vision of risks and their value. When choosing action scenario it is important to use various psychological perception of the situation. In this case intuition and logic working in pairs can help to find the best choice and provide more certainty in terms of instability and probability.