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  • Julian Talbot

How to Improve Risk Management

"Optimism bias is an author's best friend."

Following on from "What's Wrong With Risk Management" here are my thoughts on the 'Answer' to the 'Problem'. How good are you at judgement and decision-making when it comes to complex risks? Most of us are subject to a variety of hardwired biases, heuristics and emotions. These are wonderful if, for example, a car swerves onto your sidewalk. There isn't time to calculate trajectories and options ⏤ you just follow your instinct to “get out of way of that big thing coming at!” and take action without hesitation. The real problem for risk management relates to complex risks.

Availability heuristic

'Availability heuristic’ helps people predict the frequency of an event based on how easily an example can be brought to mind. It operates on the notion that, "If you can bring it easily to mind, it must be important." That worked well when our ancestors encountered snakes in the wilderness. In the 21st century, however, our media are rewarded with advertising income when they can keep you engaged. The media don’t report deaths due to diabetes, heart disease, medical errors or motor vehicles simply because they are common. Murder and air crashes are uncommon, but spectacular, so they get reported. But when you see them again and again on the news, your brain imprints such things to be of greater risk than they actually are. Hence, the rarer the event, the more we see of it, so the more common we believe it actually is.

Optimism bias

Equally impressive is ‘optimism bias’. The belief that we'll do better than most others engaged in the same activity. We are all affected by it and, mostly, it's a good thing. I would never have started any of my books if it wasn't for optimism bias. It makes me think my books will be easier and faster to write than such projects are for others. They aren't, of course, and I know all about optimism bias; but for good reason I choose to give it free rein. And you should too, if you are thinking about writing a book. It is an author's best friend.

Optimism bias

Control bias

'Control bias’ means you are more likely to accept risks if you feel that you have some control over them ⏤ driving being a typical example. We are also especially attuned to risks involving people, particularly small children, with little regard to how likely they actually are. The ‘affect heuristic’ says that an overall good feeling towards a situation leads to a lower risk perception, and an overall bad feeling leads to a higher risk perception; which helps people underestimate risks for actions that have some ancillary benefit (e.g. smoking and skydiving).

In short, we are a bundle of biases and it’s amazing that we have any conscious understanding of risk at all. If we can collectively learn, however slightly, to improve the way our risk management brains interact, that tiny improvement and subsequent re-allocation of resources is likely to vastly improve organisational, societal and global outcomes. In order to do this, however, we need to understand the issues and have the right tools for the job. A great book to give you some idea of the nature of the problem, is 'Thinking, Fast and Slow' by Daniel Kahneman.

Four key strategies

But all this isn't answering the real question of 'how to improve risk management?'. The answer is relatively simple to articulate, but challenging to implement, so I'll propose the following four key strategies:

1) Manage risk with a consistent framework (my recommendation is ISO31000).

2) Challenge yourself and your colleagues to seek and use solid statistics and data, rather than assumptions.

3) Accept that your brain is unreliable; useful but unreliable. Gigerenzer explains it well.

4) Use calibration training to learn to understand risks in a way that represents their uncertainty.

In short, we can improve risk management by applying consistent systems and thinking within a framework that acknowledges, accepts and makes some allowance for human errors, emotions, biases and heuristics. And, by using our emotions and biases to our advantage, whether it comes to leaping out of the way of a speeding van or taking on yet another book project.

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