When we consider risk, much of the discussion revolves around analytics, alternatives, probability, and bias. But, there are other important factors to consider, which are frequently excluded and, when dealt with properly, can create new opportunities. These include higher than normal results, lower than normal results, enablers, parameters for consideration, and excluding key unknowns.
Entrepreneurs generally advocate the untapped potential of their ideas without detailed analysis of parameters, requirements, and profitability. For example, Venture capital firms that take the risk of investing in several new companies only expect a few to perform with extraordinary results. Last year, they extended too far and many are in financial trouble today. However, the initial risk is appealing because, statistically, people do win the lottery, and companies like Zoom hit the jackpot and do well, especially when you consider the way they’ve evolved over the past few years.
The reverse is also occurring with unforeseen disruptions increasing risk. The slow pace of going back to work, success of tools like Zoom, supply shortages, and inflation are examples of factors not considered in much of our risk analysis. Political change, an increase in crime, and higher levels of stress are creating more uncertainty when assessing change and potential. These can all add to excessive losses beyond normal probabilities.
Another inhibitor of success are enablers. While experience and expertise can improve results, one of the worst strategies in our changing environment is tradition or the mindset that “we have always done it this way.” It simply ignores change, alternatives, and processes, and is frequently fueled by proponents who fear those same things. Sexual harassment, equal wages, and COVID vaccines are some examples where progress has been exceptionally slow due to people being unwilling to recognize the need for change and accept and implement new ideas.
Currently, everyone seems stressed and frustrated with issues like crime and inflation. However, enablers seem focused on short-term solutions rather than a true commitment to solving the problems. We must also recognize that many of these are worldwide issues. For example, both France and Israel are experiencing political disruption as well.
Additionally, inflation, oil prices, and supply shortages are all causing great disruption, which increases risk, but these unknowns will also create opportunities. Innovation in solutions like electric cars is a key area where there is ample opportunity.
Risk management is also affected by quantitative versus qualitative considerations. On one hand, quantitative measures are objective, comparable, and easier to document. However, we must ensure we are using the right measures and analyzing correctly. Qualitative data, on the other hand, can measure issues we don’t always consider and allows for intuition. But, these processes can be compromised easily or measure wrong factors. In particular, bias occurs much more frequently in qualitative analysis.
Risk analysis should also include the various impacts of diversity. The world is creating a significant amount of new wealth, yet income disparity is increasing, with 1% of U.S. households owning over 50% of the wealth. While there is more integration and assimilation, tensions have also risen in political, economic, and social structures.
When it comes to risk, we also need to consider ignorance and ways to manage it. Ignorance shows up in a number of ways, which require different approaches. Some ignorance is just the unknown—like the economy next year, the long-term pandemic impact, and potential new technologies (such as a longer lasting electric car battery). While we can’t assure certainty, we can research alternatives and their consequences.
Some ignorance comes from a lack of knowledge. Consequently, a focus on bias, parameters, and assumptions should be included in risk analysis. For example, we should understand our target audience and trends like the growing diversity and wealth in our country.
Ignorance can also be a function of pure denial. Assuming excess confidence or unilaterally accepting respected colleagues can affect risk assessments. We can avoid denial by embracing openness and searching for alternatives. Organizations need to welcome measurement and feedback. Observing, understanding, and sharing financials, operations reports, and sales reports are the first step. Simple research tools (which social media can provide) should be used regularly. A management style such as the “walk around” and simply asking, “How are you doing? Is there anything you need?” can be priceless. Look for alternatives and ‘what if’ discussions.
Viewing risk as an opportunity rather than an obstacle can help produce positive results. Change is occurring faster and faster and we must resist the urge to crave the comfort of consistency and reliability. We need to shift our mindset to one that expects risk. This might make you feel uneasy, but know that we are all in the same boat. Try to remember that staying flexible will make adapting easier. And implementing sound, proven strategies will not only set you up for success, but put you in a position to effectively and efficiently manage risk.