Risk – threats and opportunities

2020-07-18

Risk

  • There is a calculus of risk
  • Threats are downside risk
  • Opportunities are upside risks
  • Risk has odds and risk has outcomes
  • Odds are measured as probabilities
  • Outcomes are measured as impacts, favourable and unfavourable
  • We can to some extent manage risk, looking at potential impacts, reducing or enhancing the outcomes.

Risk is the stuff of life

  • There is a yin and yang of risk
  • We can avoid threats but perhaps miss opportunities.
  • We can embrace opportunities and perhaps expose ourselves to threats.
  • There are common everyday risks: to health, travel, jobs, having a shower, climbing a ladder, walking down the stairs, recreation, many domains of life
  • There are rare risks beyond our control in many ways such as natural disasters like tornadoes and earthquakes
  • Driving a car presents both threat and opportunity
  • The same for swimming in a lake, stepping outside, or staying inside.
  • There is a calculus of risk and opportunity

Who are the pros at risk management?

Risk managers may be found as:

  • Disaster response planners
  • Actuaries
  • Project managers
  • Financial experts
  • Statisticians

Professionals manage risks in a systematic way. Although they may use a formal plan, methods will differ, according to the discipline and its needs, and the training of the risk manager. A management approach might include the following elements:

  1. Plan to manage the risks
  2. Prepare for the execution of the plan
  3. Execute the plan
  4. Revise the plan based on new information

Some risk managers, such as project managers, focus mostly on threats. Some, such as investors, focus also on opportunities. Financial forecasters, actuaries, disaster planners, entrepreneurs and surely others, each seek their own balance between threat and opportunity.

Why?

  • Why concern yourself with this?
  • You can get by without using this level of discipline in your daily life.
  • We assess risk all of the time but do we do it rationally?
  • We do informally assess threats and opportunities all of the time in daily living, and in planning for the future.
  • If knowledge of the methods improves the accuracy, gives greater success, there is a better cost benefit.
  • Risk management can give a better response to opportunities and threats.
  • There’s less unnecessary panic and more reasoned actions.
  • Done well a group can be more successful; obviously a good thing.
  • However you don’t have to be a pro to use this thinking.

Odds

  • Look at the odds
  • Events have odds, reduce or enhance the odds of events
  • Outcomes have odds, reduce or enhance the odds of outcomes
  • There are ways that things can go wrong and there are ways that things can go right
  • The ways that things can go right is small
  • The ways that things could go wrong is large
  • There is a ratio of good to bad and the ratio is huge
  • There are everyday threats and opportunities
  • There are rare threats and opportunities
  • Black swan events are rare events that we have not been able to anticipate.
  • Odds lead to predictions but these have a poor record of success in many fields.
  • Predictions are based on probabilities
  • We calculate odds based on data or do some intuitive wild ass guess (SWAG)
  • Statistician calculate odds: frequentists calculate statistics one way; Bayesian’s calculate statistics another way

Outcomes

  • What are the potential impacts?
  • We can get rewarded, we can get punished
  • Identify positive and negative outcomes

Costs and Benefits

Do a cost and benefit analysis on the outcomes

  • There is a cost to managing risk
  • There is a cost to missed opportunities
  • There is a cost to missed threats
  • There is a benefit to realized opportunities
  • There is a benefit to managed threats
 ThreatOpportunity
MissedCostCost
HitBenefitBenefit

Management Matrix

  • Predictability and unpredictability give you odds we can chart
  • We can have impacts on some scale from low to high
  • We can have odds on some scale from low to high
  • Impacts with low odds are things we should devote little time to
  • Impacts with high odds are things that we should give a lot of tender loving care to
  • Low impact and low odds are things we should not waste our time with
  • Low impact but high odds are something we should devote some time to
  Threat Impact
  LowHigh
Threat OddsHighLight managementManage well
LowIgnoreLight management
  Opportunity Impact
 LowHigh
Opportunity OddsHighLight managementManage well
LowIgnoreLight management

Managing to a Plan

Plan to manage the risks

There is a certain way of thinking about risk

  • Prepare emergency response plans
  • Change the odds – reduce or increase the odds
  • Avoid – avoid negative outcomes
  • Accept – We can accept risk and not try to manage it
  • Mitigate negative outcomes – mitigate negative outcomes
  • Enhance positive outcomes – seek or enhance positive outcomes

Identify threats and opportunities

  • Assess things
  • Look at business and life risks
  • Identify potential events both favourable and unfavourable

Quantify

  • Potential impacts, good and bad
  • Odds for impacts

Prioritize

  • Some risks are manageable, some are not

Decide how to manage

  • Accept
  • Avoid if possible
  • Mitigate if possible

Identify trigger events

  • What are you going to look for, to alert you that some action is needed?

Write it all down

  • Unless you are totally intuitive, with a fantastic memory put your thoughts into written form

Prepare for the execution of the plan

  • Get your ducks in a row
  • Obtain necessary resources and supports
  • Trial runs
  • Train responses
  • Drill responses

Execute the plan

  • Execute response plans
  • Identify potential events both anticipated and unanticipated
  • Look at emergent potential risk both positive and negative
  • Monitor the environment, look for emerging trends
  • Assess ongoing changes
  • Manage the plan and the responses
  • Look for triggers during execution

Revise the plan based on new information

  • In light of ongoing experience, improve the plan
  • Adapt to changed circumstances

Conclusion

  • Which door would you choose? The one that leads to the tiger or the one that leads the diamonds?
  • Black clouds may have a silver lining; it follows that silver linings may have black clouds.
  • Within threats, there may be opportunities and within opportunities, there may be threats.
  • Be cautious, be courageous, and assess your risks well.
  • Life is like that.

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