Risk Management in Review

I recently responded to a question in a public forum regarding the limitations of risk management. The specific question posed was, “What limits our ability to effectively manage risk?” This is an interesting question given the financial crisis still underway. My response follows:

Risk management continues to be a misunderstood discipline. The truth is we do have the analytics to understand and manage most kinds of risk (at least to some extent). The more serious problem confronting our society is our apparent inability to apply that knowledge. I'm reminded of the story of a civil war soldier who was listening to one of his officers read from a newspaper. The story goes that the officer quoted from a story by commenting, "...it says here there were fifty percent casualties at the battle of..." The soldier who was listening to the officer's comment responded by asking, "...wow, is that a lot?"

The point is that having the analytics to describe risk, and having the knowledge and training to understand the analytics are two different things. My impression is that many (if not most) business leaders are poorly trained at understanding risk analytics beyond what might be described as layman's terms. What is most needed today is for our business leaders to become more knowledgeable of how to understand and use risk analytics in an effective and meaningful manner. The days of making guesses based on institutions are long gone, especially when those decisions can result in losses of billions of dollars, as well as suffering amongst the ranks of employees and other stakeholders who are ultimately victimized by those decisions.

My advice to business leaders at all levels is to make risk analysis a centerpiece of their training in graduate school. If you puzzle over terms such as variance, standard deviation, stochastic, optimization, and so forth, then it may be time to schedule some training in these skills as part of your lifetime learning plan.