Risking It All

Everything in our human experience involves risk. 

 

We all make thousands of risk-based decisions per day, whether we are thinking about it or not. Literally every movement and decision we make carries an element of risk – some so routine that we don’t even consider them as a risk, and some so important that we may agonize over them for days, weeks, or months before acting.  Leaving the relative safety of our house at all is a big risk – it’s a big, unpredictable world out there, after all.

A risk is defined by the Project Management Institute® (“PMI”) as “an uncertain event or condition that, if it occurs, has an effect on at least one objective”.  The effect or impact can be either positive or negative.  Most people think of risk as exclusively negative, and that’s what I’ll discuss here to keep it familiar.  The objective can be almost anything you wish to happen: completing a project on time, saving or making money, staying uninjured or alive, making a quality product or getting the cute woman from accounting to go to dinner with you.  Impact and risk are also often confused; think of risk as root cause.  When you break it down, the risk isn’t that the woman will turn you down; that’s the impact.  The risk is that she may be a vegan activist (when you were thinking of offering to take her to Ruth’s Chris).  If you’ve already offered and she’s already turned you down, or you find out she is a vegan before you invite her, it’s no longer a risk – it’s a certainty.  Risk is something that hasn’t happened yet.  These definitions become important when you want to actively manage risk.

Managing risk, whether conscious or not, involves consideration of risk, reward, and tolerance.  Reward is the happy sibling of risk; we are all aware of the truism “nothing ventured, nothing gained”.  Unlike many truisms, this one is actually true.  If you eliminate all risk in your life or business (a fallacy at best), you virtually eliminate any possibility of profit, achievement or happiness.  Your tolerance for risk governs how you will make risk-based decisions based on the information you possess.  My mother is fond of saying “I raised three daredevils and three scaredy-cats”, referring to myself and my five siblings.  I was clearly in the “daredevil” category, although I don’t consider myself a risk-taker to any extreme.  While Mom’s characterizations are a bit dramatic, what she was describing fairly accurately was our relative tolerance to risk.  If we think of the risk-reward equation as having two ends, our tolerance (a continuum, rather than Mom’s binary description) is what pushes the balance point towards one end or the other:

Faced with the exact same decision under the same circumstances, the risk-averse individual may make a completely different decision than his or her risk-tolerant counterpart.  If different decisions are made by the two, with equal information and consideration, they may still be considered proper risk-based decisions based on their tolerance for risk.  The same applies to organizations.  A single individual or organization may also have different tolerances for risks involving cost, schedule, convenience, health, money, and quality.  I work in pharmaceutical manufacturing, considered one of the most risk-averse industries; but our risk aversion is primarily in regards to the quality of our product.  We are very risk-tolerant in regards to convenience and other factors when viewed in comparison.

When we deal with risk, we employ risk management strategies (whether we know it or not).  In my company, we have a fairly formalized risk management process that examines probabilities, impacts and available strategies to deal with all kinds of risk.  Generally, we follow the process prescribed by PMI, which results in a “risk register” in which project and operational risks are listed, examined and qualitatively ranked.  For risks of significant probability and impact (again, considering our risk tolerance) strategies are formulated and assigned to individuals for execution.

I don’t use a risk register in my personal life, and I don’t suggest you do either.  It’s a great tool for business but keeping one on your refrigerator is likely to result in strange looks from your friends, family and neighbors, and people will avoid you at cocktail parties (because they’ve considered the risk of doing otherwise).

Risk management strategies can be broken down into generic categories (again I use the terminology of PMI since I use it and teach it).  For negative risk, these generic strategies are Avoid, Mitigate, Transfer and Accept.  For positive risk, the corresponding strategies are Exploit, Enhance, Share and Accept.

A good example for employing risk strategies, and one close to my experience, is flying on commercial aircraft (I happen to be on one at this writing).  I have logged close to two million miles in the air over the course of my career and personal life; in the first half of this year alone I flew over 75,000 miles, the equivalent of three times around the equator.  The major risk inherent in flying is pretty simple; the plane could go down, resulting in my violent death.  The risk is a crash; the impact is my untimely exit from this world.  There is a statistical probability of this happening.  Every time I board an aircraft I'm making this important risk decision. 

So -- what are the available strategies for managing this risk?

Avoidance - Don’t fly at all. Avoidance strategies are very straightforward; you remove any possibility that the risk can happen.  But avoidance strategies have a downside – they almost always result in significant consequences, which may actually increase your risk.  If I’m not flying, the avoidance strategy may require me to change jobs, or even occupations.  This is a significant consequence of avoiding flying.  I may also decide that instead of flying, I will drive to my destination.  This costs me in time and perhaps money, but even more importantly, statistics show that it increases my risk of violent death (indeed, the most dangerous part of my air travel remains my one hour drive to the airport).  I could also do a teleconference or video conference in lieu of a face-to-face business meeting.  Certainly, while this is an effective avoidance strategy, there is still some value lost.  For leisure travel, a phone call to Jamaica to ask how the beach is looking doesn’t really meet my requirements, and a boat ride there is slow and expensive.  All in all, avoidance should generally not be the first strategy you explore, unless there was little reward compared to the risk in the first place.

Mitigation - Mitigation involves taking measures to reduce either the probability of a risk occurring or the negative impact should it occur.  In our airplane example, we’re going to assume there is little you can do to significantly increase your chances of surviving a crash.  I know some claim that statistics show that crash survivors tend to be located in a specific area of an aircraft.  The sad fact is that if your plane goes down, you have little chance of survival and I don’t think that choosing a particular location on the plane is an effective mitigation strategy.  But there are ways to mitigate the probability that I’ll be involved in a crash in the first place.  I can certainly choose to fly carriers with a better safety record; within the US on US-based carriers this is probably not terribly significant, but in some places overseas when there is a choice there are some clear winners and losers.  I can also reduce the number of stops that it takes to reach my destination; most aircraft incidents are closely associated with takeoffs and landings.  Finally, I could choose larger aircraft, which are generally flown by the most experienced crews.  I won't crunch the numbers here, but there are mitigation strategies that could be statistically appealing.  Again, I need to balance the benefit of the strategy with any consequences in monetary, time and convenience cost.

Transference - Transference of risk involves moving the risk to another party.  The classic business examples of transference are insurance and contracting.  One can insure against most monetary risks; insurance companies are quite creative in this respect.  In our air travel example, insurance doesn’t make me any less deceased, but it can protect my survivors against the monetary risk of my death, providing funds to them that I might have had I continued living.  Another way to transfer risk is to simply have someone else make the trip.  If this is a business trip, I could assign or ask a colleague to make the trip.  Again, consequences loom – that person may not be as effective, may get credit that I wanted, or may disappoint a customer that was expecting me.  Your designee will also get the frequent flyer miles.  If this is a leisure trip, I could send someone else on the vacation; they might like that, but it would be wholly unsatisfactory for me.

Acceptance - This is the easy and cheap strategy, and the one that does nothing to reduce or eliminate risk.  Just suck it up, get on the airplane, and hope for the best.  This is generally the strategy that I choose when I fly, although I have from time to time employed some of the mitigation strategies I mention above. On occasion I’ve decided to avoid a flight by using video or teleconference.  But truthfully those decisions have been driven primarily by time, convenience or cost rather than managing the negative risk of flying.

The Risk Management Decision - My risk management strategy of acceptance is clearly driven by my own risk tolerance applied to the risk-reward equation.  I don’t like having to fly so much and to do so I must accept the risk that one of these days I may not make it to my destination in one piece.  But given the consequences of avoidance, mitigation, and transference, that is my management strategy.  I retain my job and occupation, get to where I need to be (mostly) quickly and efficiently, and take vacations in nice spots without the constraint of other forms of transportation.  These benefits, balanced against the very small risk of a crash, make for an easy decision on my part.

As I indicate above, your tolerance for risk may drive you to another decision – as may the myriad other risks (fear, discomfort, illness, lost luggage, profit, bad food, poor service, etc.) and rewards (thrill, travel experience, profits, speed, convenience, etc.) inherent to your own experience with modern air travel.  It is very difficult to quantify many of these and you will rarely, if ever, make any risk decision with only a calculator to guide you.  But you may find that breaking down the risk equation and examining the strategies – if only qualitatively – will give you more confidence in your decision-making.  It may also get you out of the house and on a date with the cute woman from accounting.

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