Risk Management = Banana Peels AND Dollar Bills

I've been trying to think about risk. What is it? What does it mean when we're taking a risk? Five years ago I took a risk when I left the big company I was working for and joined a very small company (at that time). Was that good or bad? And what does it mean when we're doing risk management? I should be doing risk management for the new project I'm working on. Should I be looking for banana peels around the corner? What else?

Here's the definition I found on Merriam-Webster:

Main Entry: risk
Pronunciation: \ˈrisk\
Function: noun
Etymology: French risque, from Italian risco
Date: circa 1661

1: possibility of loss or injury (peril)
2: someone or something that creates or suggests a hazard
3 a: the chance of loss or the perils to the subject matter of an insurance contract ; also : the degree of probability of such loss b: a person or thing that is a specified hazard to an insurer <a poor risk for insurance> c: an insurance hazard from a specified cause or source <war risk>
4: the chance that an investment (as a stock or commodity) will lose value

The dictionary obviously qualifies risk as something negative. It is a potential peril, injury, hazard, or loss, and we would do well to try and prevent such risks from becoming real dangers. We find the banana peel ahead around the corner, and we fling it aside. (Preferably in the direction of that other project that we hate so much.)

Unfortunately, the world is isn't as straightforward as it seems. Here's an interesting piece of text from the article Beyond Detroit (in Wired Magazine), about the American car industry (emphasis is mine):

As [Clayton] Christensen argues in his 1997 book, The Innovator's Dilemma, successful companies in mature industries rarely embrace disruptive innovation because, by definition, it threatens their business models. Loath to revamp factories at high cost to make products that will compete with their own goods, companies drag their feet; perversely, financial markets often reward them for their shortsightedness.

American car manufacturers did see a risk. They saw risk in innovation. But they didn't see the bigger risk that would be the result of not innovating. (In fact, they saw benefits in not innovating.) The saw the banana peel ahead of them, but they didn't see the fast moving Japanese truck behind them. There is always risk in stepping forward. But there is also risk in not stepping forward. Humans often only evaluate one side of change: what problems might attack us when we do this? And then they forget about the other side: what problems will attack us when we don't do this?

But there's something else that is often overlooked as well. Here's what Wikipedia says about risk (emphasis is mine):

Risk is a concept that denotes the precise probability of specific eventualities. Technically, the notion of risk is independent from the notion of value and, as such, eventualities may have both beneficial and adverse consequences. However, in general usage the convention is to focus only on potential negative impact to some characteristic of value that may arise from a future event.

Risk can be defined as “the threat or probability that an action or event, will adversely or beneficially affect an organization's ability to achieve its objectives”

So... Risk isn't just about negative things happening. It can just as well be about positive things. What's around the corner may not be banana peels but dollar bills. Have you noticed how global warming is exclusively portrayed in the media as a change with potentially negative results? The risks we've been warned against include flooding, hunger, malaria, and many more perils. But where are the positive effects of global warming? And who gets to say what's good and what's bad?

Here's another interesting little piece, this time from the article Gaia's Evil Twin (in New Scientist):

Perhaps the worst event of all was [...] the evolution of photosynthesis and the rise of atmospheric oxygen. Until that time, living things could not tolerate oxygen - it was a deadly poison to the microbes that constituted life 2.5 billion years ago. With the evolution of photosynthesis a weapon of mass destruction was unleashed, creating the first, and perhaps the most extreme, of all mass extinctions. Life was devastated. All that survived were photosynthesizers and microbes that evolved rapidly to tolerate oxygen.

Oxygen? A deadly poison? It depends on your viewpoint, doesn't it?

2.5 billion years ago, photosynthesis was a deadly risk for many microbes. It was a banana peel of epic proportions. But not for the few that were able to adapt. They found the jackpot. They saw most of their competitors being wiped from the face of the planet. Goodbye and good riddance! And no hard feelings, we hope. A deadly risk for one is a great opportunity for the other.

 

I can summarize my points with this simple little table:

action / risk	negative	positive
no change	A :-(	B :-)
change	C :-(	D :-)

When people talk about change and risk management, they usually focus on quadrants B (the positive things to say about not changing) and C (the negative consequences of change). And they easily forget about the two other quadrants of risk management: A (not changing can be worse than changing) and D (who says that change is a bad thing?).

Proper risk management covers all quadrants of the table. Risk management is about negative and positive effects. Not changing is simply a choice to go in the opposite direction, with similar but reversed consequences (positive and negative effects).

Now, I'd be really happy if someone could give me a reliable way to predict whether banana peels or dollar bills are behind me, or ahead of me around the corner...

(images by Knut Burmeister and Doublep1)

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