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Navigating Risk: How to Avoid the 5 Most Common Mistakes

In Against the Gods, the best-seller about the history of measuring risk, author Peter Bernstein writes that the difference between modern times and the past is the “mastery” of risk. Understanding, weighing and acting on risk is a fundamental task for chief executives.

A big part of navigating risk hinges on knowing exactly where your business is in terms of the so-called corporate lifecycle. An entrepreneur leading a young start-up, a founder running a mature family business and the executive team leading an international conglomerate all view risk very differently. The common thread they share is the recognition that growth requires change and change entails risk.

An appropriate risk strategy takes into account both the things we understand as well as things we either don’t understand or are uncertain about. The process of formulating that strategy will run a whole lot smoother if you can avoid the 5 most common mistakes executives make when it comes to navigating risk.

“Successfully navigating risk has at least as much to do with avoidance as it does with taking action.”

1. We think we can predict the unexpected. We frequently mistake being smart for being knowledgeable. Our ability to rapidly analyze, assess and calculate easily quantifiable problems actually has very little to do with hypothesizing what unforeseen event may be unfolding just out of range. It’s hard to imagine what kind of modeling would have helped the operators of the Fukushima I nuclear power plant to understand the risk they faced from an earthquake 43 miles out to sea. When the unexpected happens, you need to know that you have a team that can respond quickly and creatively, and save the finger-pointing for later.

2. We are convinced that studying the past will help us manage risk. The Great Recession of 2008 called worldwide attention to the perils of complacency and greed. But there’s an unanticipated ripple effect with an outsize event like what happened in 2008. Get rear-ended by a locomotive once, and the natural tendency is to spend the majority of your time riveted to the rear-view mirror. Instead, be sure to keep as much of an eye on what’s in front of you as you do on what’s behind you. Falling oil prices might be the worry ahead for your business, or the prospect of more gridlock in Washington—or that new restaurant that you didn’t know was going to open down the block.

3. We don’t listen to advice about what we shouldn’t do. We’re all about doing something. “Taking action” is considered a virtue, even if it isn’t well-advised. After all, nobody writes a business plan about what not to do. But successfully navigating risk has at least as much to do with avoidance as it does with taking action. So being open to advice on the things we shouldn’t do is essential. Imagine what revenues at 20th Century Fox might have been had someone told them not to sign away merchandising rights to an odd space movie called Star Wars in 1977.

4. Looking for a single number or variable to represent risk. One side effect of living in such an information-intensive age is that we quickly come to believe that everything can be quantified. The fact is, it can’t. If navigating risk were an exact science, there wouldn’t be a need for this article. Obviously, numbers are essential to understanding risk. But capturing the full scope of risk goes beyond a single number. CEOs must identify all of the key metrics for their business and understand their relative importance to their operations—and their interdependence. Run reports on these metrics regularly, or use data visualization software to heighten your awareness of your business.

5. We overestimate our abilities and underestimate what can go wrong. We’re natural optimists. Why else would we decide to run a business? We want to believe that whatever comes along, we can handle it. But that bias, which serves us well from an evolution point of view, restricts our awareness of what could possibly go wrong. The result is often complacency and, we all know where that got us in 2008. You must watch for the red flags in your risk metrics, foster a culture of dialogue among your team members and, when something does go wrong, learn from it.

More on the subject of risk:

Enabling the Risk Intelligent Enterprise

Enabling the Risk Intelligent Enterprise: A CEO2CEO Summit Session

Is Risk Management an Oxymoron?

Transforming Enterprise Risk Mangement

Managing Risk Through Resilience




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