Avoiding Risk Management
In the past two years, many firms and many investors have de-risked their world.
On the other hand, there is no shortage of advice that you should never seek to avoid all risk. Try typing the two words “Avoid Risk” into Google and more than half of the links that come up are discussions of why that is not a good strategy.
But one of the links that is on the first page is from the Chronicle of Higher Education. The headline is “Most Colleges Avoid Risk Management“
So you now have the classic two by two grid of choices:
Each of the four choices has adherents. But there are pluses and minuses to each choice.
1. Avoid Risk/Avoid Risk Management – a person or organization can do very well with this choice. Until – - – they are struck by a risk that they did no know that they were taking. The only risks that a person who avoids all risk takes are those risk that they are unaware of. This strategy also requires that the world not change too much. The largest risk to this choice is the risk that the person or organization will no longer have a viable strategy. By avoiding risk, they have saved themselves from the agony of failure but also from the joy of successfully developing new strategies – some of which might become the strategy for the future.
2. Avoid Risk/Risk Management – This was the Mubarak strategy. It was very successful for 30 years. Then, suddenly, it stopped working. It feel victim to the failure to adapt risk which is the second type mentioned above. But by practicing risk management, he was able to avoid the first risk above – the risk of taking risks unawares. A firm with a very successful product or business might take up this strategy, seeking to maximize value of that successful strategy.
“People who don’t take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a years.” – Peter F. Drucker
3. Take Risks/ Avoid Risk Management – On its face, this choice seems clearly irrational. However, it is widely practiced and sometimes by people that are held to be highly successful geniuses in their fields. What we fail to recognize is that some of these folks are simply lucky and the rest might well be geniuses. The lucky are noticed because of survivor bias. So if you choose this strategy, you are following in the footsteps of some of the most famous. And in your own experience, you have probably worked with people who got where they are because of luck. Someone has to get 8 tails in a row flipping coins. And if you award a senior vice presidency to everyone who does …
4. Take Risks / Risk Management – this seems like the most sensible choice. You are then left with the decision of how to choose the risks that you take and which sort of risk management to practice. Which are the main topics of this blog.
In my experience, I have found that some people define risk taking as 3 above – that is diving off the board without looking down first. When they say “you must take risks to get the rewards” they are thinking about the blind risk taking of 3. I can only suggest that a firm should seek to avoid applying strategy 3 to something on which the survival of the firm depends.
Thanks to Riskczar for the Drucker quote.
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