The Perception of Risk

It’s no secret (I hope) that everything we do in life life and business[1] is fraught with risk. From the bathroom to the boardroom, every action – and inaction – comes with some degree of risk. Try to carry too many groceries in from the car at once and risk a dozen broken eggs on the garage floor (which combine nicely with the bag of flour that split open). Forget to set your alarm before you go to bed and risk a fall in the shower, no morning coffee, or a traffic accident on the way to work. Ignore preventive maintenance of assembly line components and risk the shrinkage of your customer base. Reject diplomacy and run the risk of having the world turn against you.

Or is there actually a risk? Is risk really a matter of fact? Or is it a matter of perception?

We’re familiar with the term “risk-reward continuum”, right? The idea that risk and reward are relatively proportional? Some of us are risk seekers – gamblers – because we believe that we have to take a greater risk to obtain a greater reward and that, given what we “know” – more accurately, what we perceive – it’s OK to take that risk. Our perception of the risk in question dictates how we manage the risk, by:

  1. Avoiding it;
  2. Mitigating, or lessening, it;
  3. Transferring it (e.g., to an insurance company); or
  4. Accepting, or assuming, it.

Risk is most often defined as a combination of factors:

  1. The likelihood that a named threat will materialize, or become real;
  2. The potential impact of the threat; and
  3. How prepared – how ready – we are to deal with that threat.

Again, our perceptions are more important than reality. Everyone sees reality differently from everyone else. For example, in the “risk equation” above, is there more than one threat? How do we know? If there is more than one, which one is the most critical issue – the greatest threat – to us? What is the probability that this particular threat will take shape?

If this threat should materialize, what impact – negative or positive – will it have on our community, our location, and our businesses? Is it actually a threat or might it be an opportunity? How can that be? Well, think about the family, the community, or the business that has a disaster preparedness plan in place. One can do so much bench testing and so many rehearsals that it “feels like” a good plan, but the only true test is under actual conditions. Mistakes will happen – a foundation will not be strong enough, or pilings won’t be tall enough – but those mistakes provide an opportunity to learn and improve.

Obviously, we’re talking about preparation. Are we realistically and reasonably prepared to manage the risk?

Circling back around to perception and bias: There are tools we can use to mitigate our biases. Of those, the best remedy for biases (in my opinion) is group decision-making. Risk-related decisions cannot be made by, nor left to, just one person. Good leaders will agree. Understand and appreciate how everyone in your community, company, civic or social group, etc., sees things differently. Leverage that awareness to your advantage.

Footnotes

[1] Business is not “life” for many of us, just as actors are not real people.

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Posted in Business Continuity, Employee Engagement, risk assessment, Risk Management, Risk-based thinking

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