Risk of the human factor

Risk of the human factor Can a Risk-Type Compass allow businesses to spot where their employees are taking too much of a gamble in their work?

Carly Chynoweth Published: 13 November 2011

The art of risk

Sales people have to be willing to get out there and face failure

management lies in avoiding or managing the things that could go wrong without losing the opportunities that could go right. The standard approach is to think of it in rational, quantitative terms; people like clear documents because they create the impression that everything is shipshape and under control.

Not everything can be prescribed in black and white, though. “People are a key variable,” said David Cooper, founder of Cooper Limon, the leadership consultancy. “Whether you build them into the system or not, they will have an impact. People are a source of friction, of grit in this pure, rational view of the world.”

For example, the psychological make-up of the risk managers who create the quantitative analysis will affect what they leave out, what they include and what weight they give to each factor. “There is an

inherent risk of blind spots. If the risk managers do not look at something, it can get forgotten. You get these embedded assumptions that can be extremely dangerous.” There is also a risk of “group think” if all managers approach the task in a similar way, increasing the chance of something being missed.

The analyses have a psychological impact too. They reduce people’s anxiety by presenting uncertainty and ambiguity in a more manageable form, and they make it easy to rationalise a particular course of action.

“Having lots of numerical, quantitative analysis helps to imbue trust,” said Cooper, who was a chartered accountant before retraining as a psychologist. “It makes it appear to other people that you have things under control, that you know what’s happening ... and it legitimises your position in the organisation.”

Human beings bring a variety of negatives to the picture, including mistakes, self-interest and egomania, but we do offer positives too. These include the ability to identify new opportunities; to use our judgment to respond the right way even if it is technically a breach of the rules; to adapt to surprises; and to address emerging risks that, if left to rules or plans drawn up earlier, might not be dealt with effectively.

“People can create holes in the [safety] net, but they can also save us. They can cover over areas where things would have otherwise fallen through,” Cooper said.

How people react to risk varies greatly, although research indicates that their “risk type” — an inherent part of their temperament — stays the same throughout adulthood.However, few people are aware of others’ attitudes to risk, and tend to assume that everyone thinks as they do.

That needs to change, said Geoff Trickey, managing director of PCL, the business psychology consultancy. “Managing people is about knowing them as individuals,” he said.

“You can’t just have blanket rules — you have to know them, their capabilities, their attitudes.” People who understand their own attitudes to risk will have a better understanding of their limitations and how to balance them. Understanding how your employees think and act can also be useful, he said.

Trickey and his colleagues have launched the Risk-Type Compass, a tool that helps identify individuals’ approach to risk. It also allows organisations to spot teams or departments where particular risk types are concentrated.

The compass was originally developed to help financial advisers to understand clients’ appetite for risks. “The other applications crept up on us,” Trickey said. “It is being used for coaching senior police officers, for example, and to assess people going into hostile situations ... and at partnership level in accounting.”

It also has potential to be used when looking at board balance. “At the end of the day, how much risk exposure the organisation allows itself is a matter of governance.” Other uses could include assessment for recruitment or redundancy.”

The tool can be used to check that teams have a balance of views — where one approach becomes dominant, it tends to create a culture that attracts people with similar attitudes — and to assess the organisation’s risk landscape. “You need to know what type of risk-takers you have in your organisation because that is part of your risk landscape,” Trickey said. “You can do flow diagrams saying, ‘this is how we will manage risk, this department is linked to that department’, but ultimately it depends on who is in each of the boxes on that diagram and whether they are crazy risk-takers or very cautious.”

While the compass could be used to fill a workforce with people with a low tolerance for risk, this would be a bad idea as having too few risk-takers is just as dangerous as having too many.

“In this health-and-safety environment, risk is deemed to be something to be got rid of, but risk-taking is essential for all organisations,” Trickey said. “Sales people, people developing business, by their

nature have to be risk-takers. They have to be willing to put themselves out there and face the possibility of failure or they won’t succeed.”

Wary to intense: where do you rank?

Eight risk types were identified in research by PCL, the psychological consultancy.

Wary very low risk tolerance; cautious, vigilant and pessimistic.

Prudent conservative and conventional; prefers predictability to change or variety.

Deliberate self-assured, even tempered, organised and compliant. Nearly 25% of public sector workers are in this category.

Composed maintains a positive outlook; holds nerve and sees things through. Many entrepreneurs are in this category.

Adventurous attracted by excitement; decision-making likely to be influenced by impulsiveness and lack of anxiety. This type is the most common among directors.

Carefree welcomes variety; may lack focus; enjoys breaking new ground.

Spontaneous emotionally expressive; likes making “on the fly” decisions but prone to anxiety if things go wrong.

Intense less resilient than most but generous in commitment and passion; self-doubt makes them their own worst critic.