Junk The Risk Assessments

Sorry folks for taking such a long break from blogging.  I was busy talking to a few angels who had entered my life all of a sudden. Now you are thinking that maybe I injured my head during the last five months. An adult talking about angels, absolutely insane! As kids we are happy to believe in Santa Claus. As we grow the social norms expect us to be more cynical, and we have to say – “We don’t believe in angels”. The question is –“have you seen any with your naked eye?” Off course not, but how does that prove that they don’t exist. In life, we have not seen many things, but we believe they exist.

So now, you are wondering what I am getting at.

As a risk manager has a business head ever told you – “You don’t have any idea of the business, this risk assessment is trash.” You wished to tell him that you did a proper job but he is absolutely is absolutely refusing to listen.

When business managers  submitted self-risk assessments, were you rubbing your eyes in disbelief? You could not figure out how they have rated the risks so high or so low, completely contrary to your expectations.

Is it possible that the risk assessments are frequently wrong and serve very little purpose except for completing the paper work? The idea of discarding risk assessments is scary as operational risk managers rely heavily on risk assessments matrix to assess the probability of occurrence of risk and the impact of the same. We advise business managers to complete self-risk assessments for their units. Organizations consider top twenty risks critical and depute resources to address the same.

Despite the risk assessments, unknown risks keep popping up. Risks rated low flare up into big issues. High impact low probability risks cause a whole lot of more damage than estimated.

Research on cognitive biases shows that subjective risk assessment done without data are prone to errors. Human beings have numerous biases in their thinking, due to which they tend to make incorrect decisions. Below is the list of biases I shall discuss in the next few posts:

1)      Representative Heuristic

2)      Availability

3)      Hindsight Bias

4)      Black Swans

5)      Conjunction Fallacy

6)      Confirmation Bias

7)      Anchoring, adjustment and contamination

8)      Affect Heuristic

9)      Scope Neglect

10)   Calibration and Overconfidence

11)   Bystander Apathy

You might be wondering whether the biases and heuristics really have any impact or is it just another aspect of psychology we can ignore. Let me ask you a question here:

 

Malcolm Gladwell did an analysis in his book David versus Goliath and stated that in 63% of the cases the smaller country defending its territories won the war. The powerful invader had to backtrack and generally lost the war despite its military strength. The small defending countries win because they use unconventional strategies for warfare, garner public support, and have higher commitment as they have more at stake if they lose. Then what percentage of the risk assessments of a war are incorrect? The loss of life and property are in vain.

Wait for the next few posts, as they might make you rethink on the conventional wisdom of risk assessment done by organizations.  

References: 1. Cognitive Biases Potentially Affecting Judgment of Global Risks – Eliezer Yudkowsky, Machine Intelligence Research Institute

2.  Probabilistic Reasoning by Amos Tversky and Daniel Kahneman