The Myths of Risk Management – “Risk Man, Super Hero”

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The Myths of Risk Management – “Risk Man, Super Hero”

supermanchrisreeves“Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events[1] or to maximize the realization of opportunities. Risk management’s objective is to assure uncertainty does not deflect the endeavor from the business goals.[2]”

If you enter risk management into your favorite search engine of choice you will receive literally hundreds of variations on the definition of risk management. The definition above goes on to explain that risk management consists of, “Strategies to manage threats (uncertainties with negative consequences) typically include transferring the threat to another party, avoiding the threat, reducing the negative effect or probability of the threat, or even accepting some or all of the potential or actual consequences of a particular threat, and the opposites for opportunities (uncertain future states with benefits).”

If you take this and the hundreds (and growing) of definitions of risk management literally you would think that we are describing the actions of a mythical super hero with the powers to conquer our biggest villain, The Unknown! Imagine the costume of the super hero, Risk Man! Risk Man (or Risk Woman) does not wear tights or a cape, no Risk Man wears business attire and business casual on Fridays during the summer.

What are the super powers of Risk Man? Risk Man can see the villain, The Unknown, before it happens and can deflect negative consequences off Risk Man’s three piece suit while saving your firm from …. from …. some really bad things happening to your business goals?

Risk Man has one weakness, Hubris! Risk Man is not the only super hero who suffered from hubris. In the 19th century, Economists suffered the same weakness in the development of the theory “homo economicus”. Never heard of homo economicus? It is the concept in many economic theories (see they suffered from multiple definitions as well) portraying humans as consistently rational and narrowly self-interested agents who usually pursue their subjectively-defined ends optimally.

The definition has a familiar ring to it doesn’t it. Homo Economicus was the Super Hero of its day until reality caught up with the myth of the all-knowing human who takes the most optimal path to economic outcomes. Unfortunately, Homo Economicus was defeated by man’s weakness, Hubris. We have learned that businesses fail, sub-optimal activities persist, and we need technology to help us make decisions. Yet, the myth of Homo Economicus continues today because we do not learn the lessons of the past very well. We believe that we have developed new super heroes to protect us from Hubris.

Hubris may be the most cunning of the weaknesses suffered by our super heroes! Whenever we develop new technologies, like social media, data analytics, and risk management we believe that we are covering new ground. As these new technologies become norms in society we depend on the individuals who practice these dark arts because they are new or cool to talk about. Very smart people fail to question the efficacy of the promises offered of easy solutions or lofty expectations for better outcomes. No proof is requested and no proofs are presented.

Hubris allows us to believe the stories we create for our super hero status until reality reveals the truth. This is what happened to early economic theory but it took almost 100 years to disprove! A well-earned belief is not deterred by the cold hard facts of evidence.

To be fair, almost every scientific and human advancement had to experience some form of hubris to push mankind forward. Fortunately, a relative small number of individuals are actually responsible for recognizing our flaws in thinking to overcome hubris. Albert Einstein had to overcome some of the early work in Newton’s Theories before the Theory of Relativity was proved. So how do we combat Hubris? With Humility! The Anti-Villain weapon of choice!

We must admit that risk management cannot possibly achieve all that is promised in the varied definitions that exist. If that were true there would be no recessions, no failed businesses, no stock market collapse and no excitement in the world as we know it today. Risk Man would rule the world, own all wealth and decide the fate of mankind?

Risk Management is a serious function that should be given respect in every organization. However, to earn that respect risk management must become more humble in its abilities to defeat the forces of the real villain, The Unknown!

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