Tuesday, March 13, 2012

Risk and Uncertainty

The Memorial Cenotaph, Hiroshima Prefecture, Chugoku Region, Honshu, Japan
I'm getting ready to start teaching an operational risk course at the University of Washington, preparing lectures and discussion material.  One of the topics we will cover is the type of risk generally characterized as "unknown."

Some of the strategic planning work that ASA does with clients involves the identification of these unknown risks.  It's puzzling in life, as in work, why we can't otherwise identify and name certain types of risks and then work to reduce their potential impact.  Unknown risks remain that way because we evidently just can't bear thinking through the steps it would take to prepare for less frequent but highly impactful risks -- examples might include loss of one's job, loss of one's home, sudden wealth, or even sudden death of self or loved ones.  On a corporate level, examples might include gaps that inadvertently permit insider fraud, security breaches,  technology failures, or even botched implementations of new customer services. Yet the evidence shows that having a worst-case plan, or a backup/backout plan, makes all the difference in the world to managing both personal and corporate crises.

On the known risks side, Mother Nature leaves us no choice about identifying risk.  We clearly see what devastation can result from tornadoes, floods, high winds, hurricanes and earthquakes.  We were reminded just last Sunday on the anniversary of the Honshu earthquake and tsunami in Japan just how long it can take to recover and rebuild.  For the Japanese farmers who have lost their homes and their lands to radiation, it's not clear that they will ever be able to return home to farm the land.  It's a level of uncertainty that will persist for some time.

Japan offers those of us who live in earthquake zones some sobering but illustrative lessons.  We can remove some of the uncertainty around high impact events like earthquakes if we complete our preparations now to evacuate our homes if necessary, and to live off the grid for three to five days.  

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