I searched out a number of books in the last few years that go to the issues I have worked with or just observed and wondered “why?”. Risk Management is one of these. I must point out that I have fallen prey to many of the flaws Hubbard highlights.
Douglas W. Hubbard’s book is one of several he has delivered over recent years on the subject of improving decision making, management and recognising the limitations of the human condition. Right off the bat Hubbard directly challenges the fad currently in Risk Management, around the world, to include the upside of things rather than just the traditional downside.
“Risk as “opportunity” , in and of itself … also contradicts the most established use of the word in the practical world.. as well as the theoretical world of decision theory.”
Chapter 5
Why not include the potential good and bad in analysis of potential outcomes? Hubbard points out that ..well then we would be understanding uncertainty – this is not risk. The term is not used in this way in decision sciences, insurance, probabilistic risk analysis in engineering.
Why should it be used this way in management? This approach now finds its way into Risk Management Standards and continues to downgrade the focus of risk management as a profession. However it does help to sell a marketing message that the risk management function is about value creation not just compliance!
Hubbard draws on endless examples to highlight the importance of rigour in quantitative analysis of probability and impact while pointing out that if something seems hard to quantify , and this is a reason given for using qualitative ranking systems and heat maps, then the effort must be put into trying to work how to quantify the probability and impact.
And again, as with the work of Syed in “Black Box Thinking”, we see the value of the work of Kahneman in “Thinking Fast and Slow” .
“..since many risk management methods rely on human judgment , we should consider research that shows how humans misperceive and systematically underestimate risks.” Chapter 1.
Hubbard lays out how we fail to recall relevant experience in meaningful ways to enhance decision making based on experience, lack an understanding of chance and randomness , have catastrophic overconfidence when it comes to making predictions about future events we are responsible for ( pretty important for risk management).
Finally he shows that people with information about near misses are more likely to choose a risky alternative than people who do not have information about near misses. This means people will become risk tolerant – as people are exposed to potenial low probability risk they are more likely to take part in risk exposing activity. Please note he is not writing just about the average joe here – this is the behaviour of professionals including experts, not just managers.
This type of understanding fits very well with the stereotype of the infallible CEO – the superman , the smartest man in the room syndrome, who can do no wrong, who fails to carry out due diligence before the next acquisition disaster.
Hubbard does not just point out the flaws in our current practice of risk management he also offers methods for improvement that go to the foundations of risk management and decision making.
In my view this rich work is a foundation for management , risk management professionals development and a wealth of reminders for the directors of the board.
