How Do You See Risk? – Risk Management Is All About Your Perception Have you noticed that it is almost impossible to get everyone to agree about how (or even whether) to practice risk management at your company? Both organizations and people have risk attitudes that lead them to different conclusions about the best way to manage risk. Within each company, research shows that there are likely to be four different, and often incompatible, risk attitudes. Perspectives on Risk The four basic risk perspectives were first identified through research in the 1980s. Clear patterns emerged in the data, and they have proven quite resilient over time. Within businesses, most people tend to identify with one of four perspectives. 1. Maximizers This perspective does not consider risk to be as important as profits. Businesses managed according to the Maximizer perspective will accept large risks, so long as they are well compensated. Managers who hold this perspective believe that risk reverts to the mean—gains will always follow losses—and the best companies will have larger gains and smaller losses over time. 2. Conservators According to this perspective, increasing profit is not as important as avoiding loss. Holders of this view often feel that the world is filled with many, many dangerous risks that they must be very careful to avoid. 3. Managers Carefully balancing risks and rewards is the heart of this perspective. Firms that hold this view employ experts to help them find the risks that offer the best rewards, while at the same time managing these risks to keep the firm safe. They believe that they can balance the concerns of the first two groups, plotting a very careful course between them. 4. Pragmatists This perspective is not based on a specific theory of risk. Pragmatists do not believe that the future is very predictable, so they avoid commitments and keep their options open to the greatest extent possible. They do not think that strategic planning is especially valuable, but rather seek freedom to react to changing conditions. Each of these four different perspectives prefers a different strategy for dealing with risk. Firms led by Maximizers for example, seek out risk, believing that no risk is inherently unacceptable. Every risk presents an opportunity; the trick is to negotiate appropriate compensation for the downside potential. Conservator-led organizations shun risk of all sorts, while Manager-led firms carefully manage and calibrate both the amount and type of risk. For their part, those led by Pragmatists seek diversification but otherwise have no overarching strategy. They operate tactically, reacting to each new development. rmmagazine/2013/06/24/how-do-you-see-risk-risk-management-is-all-about-your-perception/
Posted on: Mon, 01 Jul 2013 02:29:09 +0000
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