Every time I come across someone having the title of “Risk Manager”, I can’t help wondering what this person actually does for a living. I mean, sure, risk is a real thing—probabilities of certain inconvenient events happening are nonzero after all—and I bet companies do not want bad things to happen to them so they assign people to think about that and come up with a plan. But risk is largely unquantifiable in this uncertain world we live in.
Yes, yes, risk and uncertainty are different things. Nerds will soon point out that, actually, risk is quantifiable whereas uncertainty is not. This distinction between risk and uncertainty was highlighted first by Frank Knight, who wrote in his 1921 work Risk, Uncertainty, and Profit:
"Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated... The essential fact is that 'risk' means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating… It will appear that a measurable uncertainty, or 'risk' proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all."
Imagine you get a job as a so-called Risk Manager and your first task is to advise your new company about buy/no buy in a merger and acquisition process. The outcome of your assessment will be a boolean true/false-valued result that the executive team will use as a traffic light to open the wallet or keep it shut. What would you do?
If I’d be the one doing that, I’d be like, geez, ok, uhm, let me see, who are these people? How many are they? Where are they located? What do they sell? Why do we want to acquire them? How are they doing financially? Any debt? Liabilities? Litigations? Any products?
Needless to say, acquisitions are way, way more nuanced than this. There are obscure financial details, regulatory compliance, cultural matters, etc. But it all starts with a set of questions. Those questions—or, more accurately, their answers—won’t provide by themselves any buy/no buy metric. All they’ll provide are tons of qualitative notes and paragraphs written in documents and emails with some loose numbers here and there. How to blend subjective opinions into discrete yes/no figures? Up to our creativity, really.
Following the Knightian terminology, risk is rarer than we would like to admit. I mean, quantifiable uncertainties are a luxury, and actually the exception, not the rule. The belief that risks can be precisely measured in an uncertain world amounts to an illusion—or delusion—of certainty. Still, we hear the word ‘risk’ way more often than the word uncertainty. Talking about risk psychologically soothes our minds with a false idea of scientific accuracy compared to the hazier, more elusive uncertainty. And this goes all the way to giving titles as well: someone bearing the title of “Chief Uncertainty Manager” would be almost a walking oxymoron.
It’s also worth noting how often risk assessments are forced to converge into discrete outcomes— something either happens or it doesn’t. An enemy attacks or doesn’t, a loan is repaid or it isn’t, a horse wins or loses. But there are continuous variables that are strong, albeit indirect indicators of risk. One common of such indicators of risk is volatility—stock markets are classic examples, where more fluctuating prices tend to be flagged as riskier than those showing less ‘wavy’ patterns. Engineering is no different. A project whose requirements are changing all the time is objectively riskier than a project where the variability is lower, simply because schedules cannot progress nor plans can be made on top of continuously changing rules and desires.
Risk management is, at the end of the day, about asking and collecting the most relevant questions and growing a sense of ‘comfortability’ about moving forward with a decision. Which necessarily involves tons of intuition. Intuition has enjoyed a bad reputation in corporate and engineering environments. It is seen as unscientific, vague, and non-professional. Our society often resists acknowledging intuition as a form of intelligence, while taking logical calculations at face value as intelligent1. But intuition is actually intelligence stemming from well-informed non-conscious processes. When it comes to uncertain scenarios, most decisions are gut feelings. And there’s nothing especially wrong with that. Jack Welch, the overly celebrated CEO of General Electric, explained that good decisions are made “straight from the gut.”2
If only risk managers could avoid sounding like they are the kings and queens of conscious quantification.
But they fool no one. As the phrase goes: it's tough to make predictions, especially about the future.
https://www.goodreads.com/book/show/18114056-risk-savvy
https://www.goodreads.com/book/show/5559.Jack