Thinking About Risk

it’s a common term these days – Risk. When is it good, when is it bad, when should it be regulated, when should it be rewarded. Mostly this is in context of what happened on Wall Street in the last few years and through the lens of business risk. Yesterday I came across this absolutely outstanding  profile of Gen. James Mattis by John Dickerson at Slate, which reminded me of what real risk looks like. Dickerson starts off this way:

Any risks—whether, for example, singing onstage, starting a company, or rock climbing—pale compared with the risks a soldier takes in combat. A soldier risks his own life, the lives of his comrades, and the lives of innocent civilians. An officer has this burden, and more, because he also makes the decision to risk the lives of his soldiers, knowing that some of them will come to harm.

Now THAT puts it into context, eh? And I’ll even forgive Dickerson for confusing “Marine” and “Soldier” given that Mattis is Joint Force Commander, but it’s a near thing. Smile The entire story is worth reading, and is a great example of what can and should be done w/ long form journalism. But this graf below really summed it up for me:

Mattis is an evangelist for risk with two core principles. The first is that intellectual risk-taking will save the military bureaucracy from itself. Only by rewarding nonconformist innovators will the services develop solutions that match the threats conceived by an enemy that always adapts. The second is that technology cannot eliminate, and sometimes can’t even reduce, risk. Mattis warns about the limitations of sophisticated weapons and communications. They can be seductive, luring military planners into forgetting war’s unpredictable and risky nature, leaving troops vulnerable.

All too often, we discuss risk in a vacuum – risk is good, risk is bad, we should take more risks, we should encourage risk taking, we should punish risk taking, we should regulate risk and so on. I’ve said repeatedly that this is a mistake – risk on its own is nearly always bad and should be avoided if possible. Risk in pursuit of a goal, or measured risk, or risk with an outsized reward – this is what we need to go after (I’m not talking here about risk taking like rock climbing or sky diving and such – more about organizational and business risk.) So that explicit link – risk to reward – needs to be an implied part of any discussion about how to and when to take on risk. I would say that for the last several years in our financial standpoint we missed this point completely – we made two very bad assumptions. First, we accepted the idea that risk could be essentially managed or hedged out of the system. It can’t, it’s as much a constant as is change. Second, we neglected to assign risk to broader goals. WHAT are we trying to accomplish, and HOW MUCH risk are willing to accept to get there? Show me a good risk/reward ratio and I’m in…but just talk about risk and I’ll tune out.

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