Understanding Risk. An Oxymoron?

The Daily Telegraph in the UK reported last week that the Association of Chartered Certified Accountants (ACCA) issued a report that, amongst other things, said that “a lack of management understanding of risks” was at the heart of the global financial problem. http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/3147110/Credit-crisis-caused-by-poor-bank-management-says-ACCA.html.

I certainly agree. The problem, though, is that hardly anyone really understands risks and expecting “management” to understand them is even harder to expect. Further, it appears that few understand that risks are things that “might” happen and are discovered as a result of imaginative thinking. Risks aren’t necessarily real and they aren’t necessarily something that can be “fixed” and then put “out of mind”, e.g. treated as a problem or issue.

The brains of human beings are wired to deal with risk based on anecdotes. Brains employ associative learning to seek and find patterns. This happened because “false positives” are usually harmless; whereas people who rely on “false negatives” may take themselves out of the gene pool, e.g. “That crocodile cannot hurt me because I’m wearing this special hat which protects me”.

This lead to reliance on superstition and belief which is a thought-process that is millions of years old. Science, with methods of controlling variables to circumvent false positives, is only a few hundred years old.

Risk management requires human brains thinking in scientific ways. As science has been de-emphasized in our education systems throughout the world post the Space Age, there is a shortage of people in the employment pool who know how to think in a scientific way. Worse, there is a shortage of managers who recognize and value the difference between thinking with science vs. thinking with superstition.

No wonder God gave Moses 10 “issues to manage” and not 10 “risks to mitigate”.

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