Risk book club insight

GALLUS BOOK CLUB - RISK - A VERY SHORT INTRODUCTION

OUR TAKE ON ‘RISK - A VERY SHORT INTRODUCTION’

BY BARUCH FISCHHOFF & JOHN KADVANY EVERY MONTH THE GALLUS BOOK CLUB EXPLORES A TOPICAL, RELEVANT BOOK THAT, ON FACE VALUE, COULD INFORM THINKING, SPARK SOME DEBATE AND GENERATE IDEAS AMONGST OUR MEMBERS. June’s read was ‘Risk – a very short introduction’ by Fischhoff and Kadvany. Short and concise, this book examines the social and psychological contexts that define risks and the role of science in analysing them. Many GALLUS BOOK CLUB members are responsible for making decisions that carry varying elements of risk. Understanding decision theory can be extremely useful in both analysing and justifying the extent of these risks.

WHAT IS RISK? The word ‘RISK’ derives from the early Italian risicare meaning to ‘dare’ or act in the face of uncertainty. As relevant in our personal lives as our business lives, risks are everywhere – they come from many sources and may arise either from our own acts or acts imposed upon us. Risks involve threats to OUTCOMES THAT WE VALUE and it’s price may include money, health, safety, reputation, peace of mind and self esteem.

When we consider risk we evaluate claims about facts (what might happen) and about values (what might matter).

RISK DECISIONS Risks appear in many forms:

IMMEDIATE EFFECTS (eg tainted food)

DELAYED EFFECTS (eg saturated fats)

DIRECT EFFECT (personal losses)

INDIRECT EFFECT (eg employers losses)

MATERIAL (eg personal injuries)

PSYCHOLOGICAL (eg injury to loved ones)

VOLUNTARY (eg Ski-ing)

INVOLUNTARY (eg terrorist attack)

ONE EVENT (eg eating poisoned food)

REPEATED EVENTS (eg eating unhealthy food)

Experts studying such risks may find the detail both fascinating and easy to interpret. For the lay-person however, wading through the morass of facts, values, emotions, fears, social pressures, claims and counterclaims can be overwhelming. Coping with a world of risks requires concentration on the few things that matter MOST whether we are making that risk decision as a citizen, parent, employee, investor or business person.

0203 751 6345

www.gallusconsulting.com

GALLUS CONSULTING Risk decisions involve options, outcomes and uncertainties set in a social context.

“RISKS THREATEN THINGS WE VALUE. WHAT WE DO ABOUT THEM DEPENDS ON THE OPTIONS WE HAVE, THE OUTCOMES WE VALUE AND OUR BELIEFS ABOUT THE OUTCOME THAT MIGHT FOLLOW, IF WE CHOOSE EACH OPTION.”

Risk: A Very Short Introduction explores a number of scenarios – from premature birth to car insurance. Although different in many ways, understanding them requires the same three perspectives.

The book uses decision theory to bring order to the world of risks. An aid to practical reasoning, helping people to make the best decisions possible, given what they know (or could learn) about the decisions facing them.

Decision theory looks at choices from the following perspectives:

LOGICAL (NORMATIVE) ANALYSIS

Identifying choices we would make if we were fully informed, if we were fully in touch with our values, if we followed consistent rules. Organising relevant knowledge and uncertainties.

DESCRIPTIVE RESEARCH

Understanding the necessarily imperfect ways in which people actually make choices. Contrasting the decision-maker’s intuitive views with the normative analysis.

PRESCRIPTIVE INTERVENTIONS

Helping people to make better choices.

Thinking about risk decisions in these terms treats decision making as an exercise in practical reasoning. Decision theory provides a toolkit for identifying and organising knowledge that might be helpful in making risk decisions The Book goes onto explore DEFINING RISK, using US Death Statistics to illustrate the process. It sets out risk definition as an exercise in VALUE-FOCUSED thinking – how risk is measured depends on WHAT we value and HOW MUCH value we place on it.

“SPECIFYING VALUED OUTCOMES CLEARLY ENOUGH TO MAKE CHOICES ABOUT THEM.”

TWO METHODS ARE OUTLINED: 1.

Look carefully at the values embedded in possible risk definitions

2.

Observe what people implicitly or explicitly value when they make judgements and decisions about risk

#GallusConsult

Gallus Consulting Ltd

GALLUS BOOK CLUB - RISK - A VERY SHORT INTRODUCTION

Research suggests that a number of elements can affect risk appetite: •

whether risks are relatively unknown to science

•

whether potential outcomes evoke a feeling of dread

•

whether potential outcomes could result in catastrophic loss of life

•

some risks are accepted where a compensating benefit exists

•

risk appetite seems to increase where people volunteer or have a choice to partake in a given activity

Risks are clearly not ‘black and white’ and a general threshold for action therefore tends to be set. Where risks are too complex to capture with simple, direct measurement, indicators are identified that can be incorporated into an index to inform risk measurement.

ANALYSING RISK Once a risk has been DEFINED an analysis of the risk can take place. Although often an intricate process integrating many diverse forms of evidence, the basic logic is straightforward:

UNKNOWN SITUATION - Quantify Instances - Identify Possible Causes - Use Scenario Mapping to understand potentially complex causal routes

Observe or infer as much as possible about the magnitude of risk EXTRAPOLATE KNOWLEDGE ABOUT CAUSES FROM KNOWN SITUATIONS

CLARIFY STRENGTH OF CAUSAL RELATIONSHIPS EXERCISE JUDGEMENT ATTEMPT TO CREATE SOLUTIONS / IMPACTS THAT WILL REDUCE DANGER

0203 751 6345

www.gallusconsulting.com

GALLUS CONSULTING MAKING RISK DECISIONS Risk decisions range from the simple to the complex but in all cases they involve applying BELIEF ABOUT RISKS to the PURSUIT OF VALUED OUTCOMES. Fischhoff & Kadvany examine how people SHOULD make decisions (abstract rules) and compares these with behavioural studies observing how people actually DO make decisions. They introduce a number of theories:

UTILITY THEORY

Expected utility (value) is a mathematically consistent way to combine probabilities and subjective values.

PROSPECT THEORY

People are not always rational in their decision making particularly where there are competing values. The outputs of utility theory fail to describe human behaviour because they ignore basic psychological principles.

People evaluate options based upon how it will change their lives rather than where it will leave them. For example, people care more about losses than equal sized gains. People evaluate gains and losses relative to a reference point. Changing reference points can change preferences even when the outcome stays the same. Prospect theory explores context effect and inconsistent preferences.

People can handle only so much information (between 5 and 9 things) at any one time. When decisions become too complex, some elements get lost and the most salient ones dominate preferences. There are a range of decision making rules (heuristics) that people apply unconsciously. They speed up decision making but can introduce flawed thinking.

COMPLEX

The book explores the impact of rules and regulation and highlights the inherent problems when applying a rule to a group of hazards while ignoring differences among them.

RISK PERCEPTION Individuals are faced with making risk decisions every day and these are largely dependent upon their perception of risk at a given moment in a particular context.

“AN INDIVIDUAL’S PERSONAL FATE DEPENDS ON HOW WELL THEY UNDERSTAND RISKS. THEIR PLACE IN SOCIETY DEPENDS ON HOW OTHERS PERCEIVE THEIR ABILITY TO UNDERSTAND RISKS.”

The authors explore some commonly held perceptions about risk; the impact of major disasters on risk perception, adolescent (in)vulnerability, the myth of panic, group think driving personal actions that impact collective risk and the impact of worrisome clusters of events.

They go on to explain that in order to understand how people perceive risks, clear questions need to be asked that elicit numerical answers.

METACOGNITION – DO YOU KNOW HOW MUCH YOU KNOW? However much people know about a risk, sound decision making requires ‘knowing how much they know’. People tend to use mental models to think through potential realities and these mental models can be quite distorted.

#GallusConsult

Gallus Consulting Ltd

GALLUS BOOK CLUB - RISK - A VERY SHORT INTRODUCTION

“MOST PEOPLE SEE THEMSELVES AS BETTER THAN AVERAGE AT AVOIDING RISKS OVER WHICH THEY HAVE SOME SENSE OF CONTROL.”

Over-confident people may overlook signs of trouble and unwittingly take risks. Under-confident people may be overly cautious, spending excessive time gathering information and ruminating when they should be acting.

RISK COMMUNICATION Appropriate communication of risk is vital. Costs of poor risk communication can be high – wasted effort, loss of reputation and needlessly poor decisions.

This model shows one approach to improving communication without sacrificing scientific accuracy. Written for Governments and corporations, it could also apply, in principle, across the board.

Initiation

Preliminary Analysis End

Go back

Risk Analysis

RISK COMMUNICATION

Next step and/or take action

Risk Estimation Risk Assessment End

Go back

Next step and/or take action

Risk Evaluation

Risk Managment

Go back

End

Next step and/or take action

Risk Control End

Go back

Take action

Action/ Monitoring Recommended procedure for managing risks - taken from ‘Risk - A very short introduction’ by Fischhoff & Kadvany (p. 132)

0203 751 6345

www.gallusconsulting.com

GALLUS CONSULTING All in all a great little book that provides food for thought regarding risk from a wide range of perspectives and contexts. It’s an enlightening and interesting read that is bound to make you think just a little bit differently when considering the potential risks in your life and work and making decisions as to how to handle them or what actions to take in a given situation.

Gallus build sustainable, high performance environments that everybody can believe in. With particular expertise in leadership capability and alignment, organisation design, business transformation and enterprise risk management, Gallus challenge assumptions, cultivate belief and drive positive change by making performance excellence systemic.

An established business with Headquarters in Northampton, UK and offices in London, Manchester and Aberdeen, Gallus work with ambitious organisations across the world from a wide range of sectors. Find us at www.gallusconsulting.com or call +44(0)20 3751 6345.

JOIN THE GALLUS BOOK CLUB ON LINKED IN TO REVIEW AND DISCUSS RELEVANT, TOPICAL BUSINESS BOOKS WITH LIKE-MINDED INDIVIDUALS. EACH MONTH WE WILL CHOOSE (WITH MEMBERS INPUT) A BOOK TO REVIEW AND ONE LUCKY MEMBER OF THE GROUP WILL RECEIVE A COPY OF THE CHOSEN BOOK!

#GallusConsult

Gallus Consulting Ltd