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The Failure of Risk Management

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The Failure of Risk Management

Why It’s Broken and How to Fix It

Wiley,

15 min read
10 take-aways
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What's inside?

The problem isn’t measuring risk; the problem lies in using the right tools.

Editorial Rating

8

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  • Applicable

Recommendation

As capitalist economies careen from one crisis to the next, it’s tempting to believe that risk management is some sort of dark art. Risk consultant Douglas W. Hubbard agrees that the economic collapse of 2008 stained his entire industry. But, he argues persuasively, the problem isn’t that risk-management tools don’t exist or don’t work; the problem is that people too rarely use effective tools. Combining plenty of real-world examples and a clear writing style, Hubbard creates an accessible user’s guide to risk management. To his credit, he doesn’t puff up his own formulation, mentioning it as one of several Monte Carlo approaches. He lays out a strategy that’s easy to follow: Start by adopting a skeptical mind-set, invest in some software, then devote time and energy to gauging the chances that “something bad could happen.” getAbstract recommends his instructive manual to executives and investors seeking insight about managing risk.

Summary

Sometimes It’s Science; Too Often It’s Hocus-Pocus

For all its faux sophistication, much of modern risk management is no more rigorous than astrology or soothsaying. To protect their organizations from calamity, risk managers often rely strictly on common sense or fatally flawed models. As a result, managers often overlook or underestimate risks ranging from the financial crash of 2008 to an IT project that doesn’t work or a product launch that falls flat. Risk means that, simply put, “something bad could happen.” Management is the art and science of “using what you have to get what you need.” Join these two perspectives to get the definition of risk management: “Being smart about taking chances.”

Yet far too many smart managers are unwittingly dumb about risk management. Without a feel for statistics and lacking the skeptical soul of a scientist, they’re all too willing to accept their organizations’ faulty practices or a consultant’s bogus recommendations. Three reasons account for the widespread failure of risk management: First, no one measures whether risk management tactics work; you assume that if nothing bad happens, it’s because of prudent risk management. ...

About the Author

Risk consultant Douglas W. Hubbard is the author of How to Measure Anything: Finding the Value of Intangibles in Business.

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