Magazine article Risk Management

How Do You See Risk? Risk Management Is All about Your Perception

Magazine article Risk Management

How Do You See Risk? Risk Management Is All about Your Perception

Article excerpt

WITH FOUR TYPES OF PEOPLE AND FOUR WAYS TO MANAGE RISK, THERE ARE MANY STRATEGIES ORGANIZATIONS CAN USE TO DEAL WITH THREATS AND OPPORTUNITIES. ALL CAN WORK, BUT THEY MUST BE ALIGNED AND EVOLVE ALONG WITH THE TIMES.

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 overarchins strategy. They operate tactically, reacting to each new development.

Risk Management Strategies

People aren't the only things that fall into categories. Careful examination of risk management practices in a large number of firms reveals that there are also four different strategies that fall under the general heading of risk management.

1. LOSS CONTROLLING

This is the most traditional form of risk management. It seeks to identify and mitigate the firm's most significant risks. This includes activities such as safety programs that seek solely to reduce losses. One characteristic of these processes is that they often seek to get everyone involved. This type of risk strategy is favored by Conservator-led firms. It is particularly appropriate for managing risks that are acute and severe.

2. RISK ACCEPTING

Many financial firms favor an approach to risk that focuses mainly on getting the price of risk correct. For banks, this can lead to complicated models of risk and reward. A Risk Accepting strategy is most often applied on a transaction-by-transaction or project-by-project basis. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.