Risk School Series
Risk management affects everything we do. From the moment we wake up and take that first step to get out of bed, we manage risks. That second cup of coffee, the speed I drive at, those drinks after work… every decision involves my management of uncertainties and exposures to certain hazards.
Most of these decisions are ubiquitous and largely binary, but the following principle of risk management applies to all situations:
Risk assessments measure the severity of hazards and our level of exposure to them. Risk management is the reduction of exposure to hazards (harms) to as low as reasonably achievable (practicable) or ALARA (ALARP). Note that some have recently added the term “vulnerability” to this equation (as in how susceptible we are to suffering from such exposures). This though is part of how exposures are measured.
This principle applies equally whether we wish to obtain or enjoy a benefit / social good or avoid a harm / unpleasant situation. It also applies to every type of risk: financial risks that investors take, health risks that consumers take, political risks that regulators take, environmental risks that industry scientists take, tactical risks that soldiers / gamers take… I had even added a novel type called “righteous risks” where exposure to moral outrage has a significant influence on decisions or policies.
But is “hazard times exposure” the only measure dictating risk management? Risk is not merely a mathematical equation, in fact, far from it. Our perception of risks, what guides our decisions, is emotional. We fear certain exposures (eg, pesticides, chemicals…) even though the hazard level (eg, toxicity) is very low. Conversely, we nonchalantly expose ourselves to significant hazards (eg, stairs, traffic, coffee, alcohol…) with scant evaluation of the risk principle.
One element that risk managers often overlook in risk principle calculations is the power of the motivation to be exposed to hazards. Risk takers are driven by the plan or mission they have. In other words, the level of exposure to hazards we are willing to tolerate is determined by the importance of our plan or mission. We might rush across a busy street if we are late for an important meeting, but not if we are just out for a walk. Even the lowly chicken crosses the road with a plan (to find better grain, get away from the fox, out of the sun…). We take risks (tolerate exposures) according to the benefits we perceive, and these are driven by our plans, missions, objectives, goals…
Plans Dictating our Risk Tolerance
My children are starting to realise excess income that they want to invest. I asked my daughter last week what her investment plan was. She gave me a strange look. But the level of risk she will tolerate (her openness to exposure to market uncertainties, types of stocks, funds…) depends on her plan. Does she plan to buy a house, retire early, go on a big vacation or just want a nest egg to feel secure? People with no excess income are not managing their financial risks and have no financial plan (but rather, in debt, are exposed – vulnerable – to greater risks).
Managing risks (reducing exposures to hazards) helps us to survive. Plans are what makes us human, that drive forward, to be better, get better and thrive. Any ambition, goal, objective needs a plan (a path of execution) or mission (how we get to where we want to be) that is essentially tied to risk management. Without plans, our tolerance to risk exposure is weak (we become dangerously risk averse). Some examples:
- Today I see countless memes from millennials claiming that capitalism has failed and only provides benefits to the already wealthy. No … these critics have just never had a plan motivating them enough to manage exposures to capital management (or are too financially illiterate to execute a plan). Sometimes people with business or investment plans don’t execute well (they fail to sufficiently manage exposures) and go bankrupt. Quite often, though, they are back with another plan shortly after. Those who are risk averse or poorly prepared to manage their finances and not benefitting from the opportunities capitalism provides should learn to make their own plans (rather than relying on some Nanny State officials to take care of them when their options run out and they become a burden on those who have executed their plans).
- People trying to lose weight have a plan that dictates their food consumption and exercise regime. They will let themselves go hungry or go out for a run to carry out their plans. Yo-yo diets are quite common when people lose sight of their plans (… or they are overcome by other plans at the Korean buffet). As dieting is not enough for many to achieve their goal (I get that), there are now more options, from pharmaceutical, surgical to lifestyle solutions. For those struggling to keep to their plans, they may need a more dominating goal (like signing up to run a long-distance race). Often achieving a personal plan motivates a person to set higher goals. Just talk to a running addict.
- A person diagnosed with a disease will need a plan to survive. This plan may involve a radical lifestyle change, taking quite hazardous or experimental medicines or uncertain surgeries. Risk tolerance increases when choices (plans) become more limited.
- Likewise, refugees will get on questionable boats, exposing themselves to extreme hazards, if there are no other viable choices. They have plans for the future and will expose themselves to major hazards (ie, risk their lives) to achieve them. The risk-averse don’t want these migrants landing on their shores but I can tell you whom I’d prefer to have as my neighbour.
- Sometimes the plan is to just survive. When our kids were small (we had three under three) and we had no family to support us, our plan was to just make it through each day (physically, mentally, spiritually, financially, professionally…). For many suffering through mental health crises and just living to fight another day, having a plan to survive is essential to manage exposures to daily life-threatening hazards.
Taking these points into account, the risk principle should be revised to the following:
Risk = Hazard X Exposure – Plans
The degree of our planning/mission will determine how much exposure to hazards we are willing to assume. And that can help us understand a particular challenge to risk management.
No plans? Precaution is the Solution
The precautionary principle is often invoked when the levels of uncertainty are deemed too high to allow the risk-management process to be effected. Precaution is not risk management (managing exposures) but rather uncertainty management (when we are not sure about the exposures). But precaution is also only invoked when the benefits, the plans, are not defined or deemed important. A region that produces a surplus of food, for example, can take precaution toward agricultural technologies and manage with lower yields. We will still be able to eat. But when activists try to impose their luxury food label on regions facing food security risks, that borders on the criminal.
One could argue, though, that the precautionary principle is a plan – to not take unnecessary risks (ie, remove all exposures to hazards). That is indicative of a situation with any plans, missions, goals… I won’t cross the street because there is nothing there that interests me. But the moment another plan is identified, precaution becomes an obstacle.
Affluence masks hard decision-making allowing consumers to busy themselves with managing minor, meaningless risks. Having abundant food and water means you can bother yourself with questions of reducing exposure to pesticides, bottled water and buying organic-marketed luxury food. Those with access to many energy options will opt for renewables to keep the lights on. I have referred to these as “righteous risks” and the danger is when the environmental-health activist class assumes that their affluent lifestyle choices, coupled with their righteous self-assertions, can easily be imposed on those struggling to afford vegetables for their children or heating for their homes. It gets even more obscene when they impose their principles on developing countries (like their campaigns against Golden Rice or forcing ESG restrictions on funding natural gas energy projects).
For the affluent activist, the plan guiding their risk/policy management is to have food purity, all-natural, regardless of the scientific evidence. Plans are easy to make when you have many options. If you cannot afford your grocery bill, buying organic or other cult-driven food preferences doesn’t move the needle. Exposure to hunger or poor diet makes very low potential exposures to possible carcinogens (in mice) shows how ridiculous these non-issues are. Sadly the plans for the future of food abundance are being decided by the affluent and the well-fed who are not exposed to any real risk drivers.
Do Governments have Plans?
Most government or institutional administrators today lack the motivation to set goals. Their main goal, a personal plan, is to be promoted and the cadre structure is designed to punish those who make mistakes rather than rewarding those who execute plans to improve societal well-being. Today we see regulations that just try to muddle through, with no plans for betterment or advancement. The key objective administrators have on their desk is to make the problems go away with as little (personal, career) risk as possible.
The precautionary principle has been perfectly designed for these horrible creatures. Risk aversion is the product of these shiftless administrators just trying to make it to their next promotion, no matter what the societal cost. GMO regulations might come back and bite me in the face? Take precaution no matter how many people elsewhere may suffer. Managing the risk of a coronavirus might lead to consequences so locking down entire populations (precaution) is favoured no matter what happens over the long term to a society. Of course, if these populations then come out into the street and start protesting lockdowns or supposed green deals, the administrator’s survival plans may kick in and policies will change.
Leaders who inspire are those with clear plans for betterment, clear execution paths and an ability to communicate their strategic goals. Our leaders should be promoting research, innovation and development, moving populations toward a better future. They need to execute according to the best information, identify the best opportunities and constantly evaluate. In the West, we largely lack this leadership.
Writing this from my perch in South-East Asia, leaders see the need for clear plans, strategies and objectives. Populations, lives and economies depend on such developments. In the affluent West, the public, like the administrator, is largely risk averse. The concept ‘better’, for those with full bellies in warm, cosy living rooms, means something completely different (less progress is better) than for those struggling for food, shelter and energy (progress of any kind is better). And their risk management decisions reflect that.
It could be argued that RFK Jr fits this mould of a leader, with a clear path to Make America Healthy Again (MAHA) well-communicated to an army of motivated followers. What he lacks though is a clear, rational execution path. Ideologues like RFK Jr are fixated on their missions and tend to gloss over details, fail to manage exposure to hazards and lose sight of what are acceptable risks. RFK Jr is a dogmatic zealot blinded by certain prejudices (natural, anti-industry, suspicious of research and innovation…) that interfere with rational administrative execution. It is quite OK, within his ideology, if a certain number of children die from preventable diseases like measles. He is sheltered by a MAHA army of relentless grifters offering simplistic solutions to complex problems, so unless he takes a more rational approach to executing his strategy, failure will be his destiny. How many will suffer until this realisation is made?
For risk managers, then, the question is not just how well you rationally reduce exposures to hazards, but also how it is related to the plans or missions. How much exposure to hazards are you willing to tolerate to achieve your goals or make decisions? How will you be able to execute your plans amidst all of the hazardous obstacles? This is the key for all types of risk management.
So what’s your plan?
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