Friday, August 14, 2009

Risk Management?

A few days ago I discussed the problems of crises, how they get our blood flowing and at times divert our attention from more important issues. However there are crises that are both real and urgent. Families may face these with financial problems or sudden health issues. Governments face them when threatened militarily or otherwise. How do we deal with these problems? One field that has developed in recent years is “risk management.” The idea is to manage the risks and thus avoid the crises they may generate. That is a good idea but I dislike the term “risk management,” I think I would prefer to call it “risk preparation.” In most cases we do not manage the risk. What we manage is ourselves.

Most risks just are, we can do little or nothing about them. The drunk or careless driver who shares the road with us; the dangerous curve on that road; the susceptibility of our bodies to certain illnesses; the risk of a layoff at work – all are beyond our control and we cannot manage them. However we can manage ourselves. We can drive defensively; we can take care of our health; and we can be prepared to change jobs or live on savings if necessary. We face many other risks, most of which we cannot control, but we can control how we prepare for and respond to them. With preparation, what might have been a crisis becomes only a nuisance or sometimes even an opportunity.

I know, some of you are thinking that this is just semantics. I disagree. What we call something affects how we think about it. If we think in terms of managing risk, the focus is on external factors that we probably cannot control. However if we think in terms of our own action we will focus on what we can do. That is much more likely to result in effective action.

So how do we manage ourselves and prepare for risk? The first step is to understand, as well as we can, what risks we face. That understanding should go beyond a simple list to include probabilities and consequences. This is related to a blog I published earlier about probability, expectation and utility. The risks of most concern are those with a high probability of costing us dearly.

As an example, consider what happens when I go rock climbing – yes I'm silly enough to do that. If I'm three feet off the ground, the consequences of a fall are minimal. Unless I plan to go higher I probably won't bother with a rope, even if the probability of a fall is high. However if I'm 100 feet off the deck things get a bit more interesting. Even if a fall is unlikely I'll probably be tied into a rope.

Step one in risk preparation is to know the risks, how likely they are to materialize, and the possible consequences. That tells us which risks are worth our attention.

Second, we need to determine what we can control and what we can't. I cannot control the hand and foot holds on that rock face, nor can I control the possibility of falling rock. I can pick my route though, and that may avoid some problems. Likewise in life there are risks within our control and some that are not. Even if we cannot control the drunk who may share the road with us, we can control how, when and where we drive. We cannot control the genes we inherited from our parents but we can control the way we eat and the exercise we get. We cannot control an employer's financial situation but we can control our preparation in case of a layoff.

Third, we should decide how to prepare for those risks. In some cases we can reduce or eliminate the risk. When I was a young man on the dairy farm, being kicked by a cow was always a risk, but usually not a high risk. However there was one cow that would fight and kick through the entire milking process. It took several men to control her and she still sometimes managed to kick one of us. My father finally decided that he could manage that risk very well. In fact he eliminated it completely. That cow never kicked anyone again and there was a bit more hamburger on the market.

Of course it is not usually practical to eliminate risks so we just decide how we will prepare for them. I could forgo rock climbing and thus eliminate that risk to myself, but at the cost of the enjoyment that sport provides. Instead I can take other measures. I can learn how to climb better, thus reducing my risk of a fall. And of course a properly used rope doesn't reduce the chance of a fall but does greatly reduce the adverse consequences. I can also look at things like weather and maybe climb tomorrow instead of today if an electrical storm threatens.

Likewise in life we can look at things like driving defensively and even not driving at dangerous times, like New Year's Eve when more people are likely to be drunk. Such actions reduce the likelihood that we will encounter the risk, even though that risk is still there. We can take measures to reduce adverse consequences. My climbing rope is one of those “consequence-reducing measures,” but so are things like insurance, diversified investments, and home smoke detectors.

On the national scene as well, there are risks we can and cannot control. Our ability to control the fanatic wing of Islam is limited to say the least but we can try to keep its operatives out of our country. We can also try to eradicate them in their strongholds though that is difficult and the outcome is uncertain. However in my opinion we as a nation have yet to make the effort to really understand this risk. Too many people think of those fanatics as simply another enemy, failing to recognize just how implacable they are. The fact that they produce people willing to kill themselves in order to hurt us should tell us something about them. Sadly we may not want to recognize what it tells us, but recognize it we must. It should motivate a study of those fanatics, their motives, methods, and weaknesses. Sadly, I’ve yet to see much understanding at that level even in our national leaders.

Once we understand the fanatics we can think about how to try to eliminate them and how to reduce their ability to harm. However any strategy not based on a sound understanding of the problem is doomed to failure. We cannot manage the fanatics. They manage themselves so we must likewise manage ourselves. We must use our strengths and shore up our weaknesses to stop them. However a full treatise on that subject is beyond the scope of this blog so let’s return to the general subject of dealing with risk.

To summarize:

There are some risks we can change or eliminate. If the risk is serious enough, we should do that.

Most risks are beyond our control so we must find other means to deal with them.

We usually don’t manage risk, we manage ourselves. We decide which risks are in our control and how to control them. For other significant risks we decide how to protect ourselves or how to reduce the damage they can do. We do this keeping in mind our abilities and how much it is worth to ameliorate each risk.

If you like my blog, please tell others.
If you don't like it, please tell me.

No comments: