Risk is a funny thing. As humans, our brains struggle to process it and this is often a tricky situation to navigate.
Take the recent pandemic for example. We are all aware of how the disease is transmitted. We all know the concept of a bubble.
Enter human emotion.
For example, how many of us were very strict about keeping our families safe, but then turned the other way when our kids were going to school and exposed to countless others?
Or when we need somebody to babysit?
Or reacted emotionally and aggressively when told we had to wear a mask?
All of a sudden, our emotional needs take precedence. Convenience trumps fear. It doesn't matter what science or mathematics says.
This is the problem we see with any group of humans. A trained statistician can talk risk. The rest of us mortals are left with a gut feel.
Business is of course the art of making bets and mitigating risk. We need cash flow so we get lines of credit. We diversify investments and products to avoid sinking the company with a single trade. So on and so forth.
And yet, many times we get caught blindsided. Or as entrepreneurs, we make emotional decisions instead of rational ones. This can sometimes work in our favour, but often it doesn't.
So how can we combat this irrational human condition? Many companies develop risk management programs. The easiest example is safety. Instead of a risk, we just call it a hazard.
And yet with safety, once again human emotion reigns supreme. We cannot accept anything except perfect safety records and a 100% probability that we all come home every day. Even as I write this I am nodding my head.
Any mathematician will tell you this is impossible. Nothing is guaranteed. The riskiest thing you do all day drives your car to and from work. Do we ever think twice about that? Nope.
So back to the problem at hand. How can we apply the concept of risk and probability to a business, without getting emotional and overcompensating?
Some businesses create "risk registers" where they list risks at each level of the organization. This is a great risk creation exercise resulting in hundreds if not thousands of line items now requiring actions. The ironic thing about this is that this act itself is incredibly involved and actually distracts from the inherent risk mitigation that we undertake as part of our daily activities. Paper does not equal results.
Perhaps posing the question in a different way would help.
Ultimately what we want is a group of people to behave in a specific way. So let's ask about behaviour.
What behaviours do we want to encourage that would lead to a lower probability of a specific risk or set of risks from manifesting?
Now we're getting somewhere.
This of course begs the follow-up question "How do we influence behaviour?"
That answer is simple. We measure.
Humans love to measure things. We love to compare ourselves and more importantly we love to compete.
So in addition to the classic financial metrics, we can add metrics aimed specifically at human behaviour. Simply understand the risk you want to avoid and the behaviours that will cause that to happen. Then invent a metric and test it.
If your business does a lot of driving, perhaps a percentage of driving time over the speed limit to try and reduce speeding. Or if you have complex processes, audit them on a variety of criteria and score your projects.
Often this takes several iterations as we also struggle to pick the right relationship between metric and behaviour. This being due to the fact that humans also love to "game" the system. So you may end up inducing the exact opposite behaviour you are trying to avoid! For example, IT departments often use tickets and the average time of open ticket to drive customer service. This works to a point but then sometimes this results in poor customer service when you are now refused help unless you have opened a ticket!
In conclusion, risk doesn't have to be complicated. It's just people, and people behave in predictable ways when exposed to the same external environment.
So be the puppeteer, but don't expect to get it right the first time. Humans are also notoriously clever so tread carefully!