Eight Common Myths about Business Risk


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It seems everyone has an opinion about cholesterol. Most people know there are two types, good and bad. If you ask a friend, he or she will tell you to eat more of the good kind, and less of the bad.

Now, I’ve learned that’s bunk. There’s a bad version of good cholesterol that causes disease. And I learned there’s a good version of bad cholesterol. Confused? Me too. From now on, I’m just going to refer to cholesterol by its chemical designation, C27 H46 O.

The word risk suffers from the same confusion. Like cholesterol, risk, by itself, is a thing. Neither good nor bad. What gives risk its meaning, its emotional potency—or mojo—is context. As The Economist reported “Though changing appetites for risk are central to booms and busts, economists have found it hard to explain their determinants . . . the willingness to run risks varies enormously among individuals and over time.”

What is risk? Webster defines it as “possibility of loss or injury.” In most business contexts, risk has broader meaning, which I describe as uncertainty toward achieving a goal. Risks live in the gap between a prediction, and the result that actually occurs. The outcomes can be positive or negative.

Marketers and business developers have long used risk as a competitive weapon. “Buying from our company right now will protect you from falling hopelessly behind your competition.” At the same time, myths about risk trouble them, skewing their assumptions and expectations into strange places.

Myth #1: “When customers are concerned about risks, it’s mainly because they just don’t have the right facts.” Facts are only part of the decision-making apparatus. “Any decision relating to risk involves two distinct and yet inseparable elements: the objective facts and a subjective view about the desirability of what is to be gained, or lost, by the decision,” wrote Peter Bernstein in his book, Against the Gods.

Myth #2: “All of our customers face similar risks and have access to the same information, so their decision criteria are basically the same.” Even if it were consistently true, people perceive risks differently. If every person had the same risk appetite or capacity, our financial markets could not function.

Myth #3: “The main idea behind risk management is to eliminate or minimize risks.” While risk management involves an organization’s efforts to control the probabilities that something bad might happen, it’s more than that. Risk management requires identifying risks or threats, assessing them, and prioritizing which ones to manage. That might mean eliminating or reducing them, but could involve sharing or transferring them. Effective risk management includes understanding a company’s risk capacity, figuring out which risks provide competitive advantages, and deciding which ones to accept.

Myth #4: “Products with short time-to-value are less risky than those with longer time-to-value.” Contrary to some sales-storytelling assertions, there is rarely any certainty about value achievement. Extending the flawed logic in this myth, buying a lottery ticket for next week’s drawing would be less risky than buying a US savings bond.

Myth #5: “When solving a pressing business problem, companies that delay decision-making incur greater risks than those taking immediate and deliberate action.” In fact, a company that has committed investment capital and project resources toward a goal often can’t turn back. That can put it in a riskier position than a company that has retained its financial and technological options.

Myth #6: “The biggest risks my company faces are financial.”  Strategic risk can have devastating consequences for shareholder value. Boo.com, Pets.com, The Learning Company. During the Tech Bubble, these companies and many others suffered significant losses in market capitalization because they had strategies that proved disastrous.

Myth #7: “My company doesn’t have ethical risks.” Compounding this myth is the unreliable self-assurance that because every job candidate goes through an extensive screening process, “that sort of problem can’t happen here.” But it can. Almost everyone knows of a former co-worker who operated from an ethically-shaky playbook.

Myth #8: “A company can minimize its risk exposure by implementing sound quantitative performance measurements.” Performance measurements help, but sometimes, there are highly-consequential risks that aren’t manifest in what’s measured and reported.

Unlike cholesterol, I think there are benefits to thinking about risks as good or bad. But those labels can only be applied when the environment where they are present is known and understood. Debunking myths about risk, and moving beyond its pejorative meaning will help people think about risk in new ways. Not as something that always has to be faced down and avoided, but as something that, when embraced for the right reasons, opens new opportunities.

Republished with author's permission from original post.


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