Planning for Risk in 2014
Barry Ritholtz provides some outstanding predictions for 2014.
His point, that we cannot predict the future, is well made.
But equally true, we need to have some view of the future in order to continue. The position that Ritholtz takes, that the future cannot be predicted is actually one of the four Risk Beliefs that is described by the Theory of Plural Rationality. If you hold that disbelief about any of your risks, then your best strategy is to make many smaller commitments.
The other three beliefs are:
- Risk is predictable and it will be very high. Need to be extremely careful. Probably shouldn’t plan to grow at all.
- Risk is predictable and it will be low. Time to expand.
- Risk is predictable and it will be moderate. Careful and limited risk taking and expansion can work well.
If you are in the risk business, then you choose a strategy for each risk. Hopefully, you will be doing that AFTER you have collected information about the trajectory of each major risk.
However, some management teams will start from the results that they “must have” to determine their strategy.
If you have done that you should look now at your belief for each risk. Where you see a mismatch between your belief and your strategy for a risk, you should start making contingency plans. Otherwise, you will be in for a Surprise.
For example, if you planned to grow at a substantial pace, you need to experience a low risk environment. Otherwise, your growth is likely to be a very mixed blessing. (see the Surprise article for details of the surprises that can be experienced by every mismatch between the actual risk environment and the risk strategy)