Risky Business

After living through the economic conditions of the last two years and after reading Nassim Nicholas Taleb’s The Black Swan, one would not be blamed for throwing up one’s hands and conceding that humans are not very good at measuring, assessing and protecting against risk.

Surviving and Thriving In Uncertainty: Creating the Risk Intelligent Enterprise by Frederick Funston and Stephen Wagner strikes back against such despair and provides a useful analytical framework for assessing risk.

The authors boil risk assessment failures to ten factors, many of which are caused in large part by common human cognitive flaws such as, failing to challenge assumptions, expecting the future to look like today, failure to remain vigilant, ignoring interdependencies, underestimating rates of change, taking facts for granted, not providing a safety margin, organizational sloppiness, and short-term thinking. Admittedly, many of the “risk intelligence” skills offered by the author are largely common sense, but this serves to underscore the difficulty of institutionalizing common sense in an enterprise.

The authors also score points for highlighting a failure to take risks as a risk in itself. Intelligent risk management not only preserves current assets, but also expands the opportunity for future income streams.

For a more historical perspective on risk, I recommend Against the Gods: The Remarkable Story of Risk by Peter Bernstein. This engrossing work reviews the creation and development of risk management (i.e. the idea that future events can be understood, measured and predicted) by surveying the history of probability theory, statistical sampling methods, business forecasting, game theory, insurance and derivatives, and chaos theory.

Against the Gods, The Black Swan and Surviving and Thriving in Uncertainty make for a recommended trilogy for any in-house counsel looking to provide some rigor around risk assessments.

The butterfly effect is a concept from chaos theory that holds that small factors may create huge variations in a system; the idea being that a butterfly flapping its wings in one part of the world could conceivable lead to a hurricane in another part of the world. Applying that metaphor to risk assessment, I wish that you may always capture your risks when they are still butterflies.