Risk is everywhere, from business to the foundations of nature and
society.
The fact that risk is inescapable means that evaluating it is not exactly a new
concept, but it hasn’t always been done with the best methods or most useful
tools. Casting bones and reading tea leaves produced mixed results. People with
crystal globes cornered the market for a bit; followed by astrologers, Ouija
boards and Magic Eight Balls.
None of these, however, could put an accurate dollar figure to the question,
“What is the threat and what will the cost be if it happens?”
Eventually, an equation was developed that did try to encompass all this:
That is certainly better than a Ouija board, and many of today’s businesses —
under threat from one type of risk or another — still use it.
But consider how much this formula leaves out. In Pompeii and
Herculaneum, for example, some — seeing the volcanic Mount Vesuvius
belching smoke — calculated the likelihood of a massive eruption and determined
it was not great enough to merit precautions. The magnitude of probable damage
if it should happen, on the other hand — as they could clearly calculate, and
as what actually happened
demonstrated — was death and destruction.
Others in these towns made a different assessment of likelihood and hightailed
it out of there when the mountain rumbled. Yet the model above is wrong from top
to bottom even if — for occasional threats — it may, like a broken clock,
sometimes point to the right answer. It is wrong because it’s missing several
critical factors that impact risk for good or ill.
The first of these is Vulnerability. The residents of nearby Naples were
confronted with the same eruption at the same time, but the greater distance
from Vesuvius made the level of vulnerability very slight.
A more useful model, then, would have been this:
Or, put more simply:
Using this methodology, the denizens of Pompeii living in underground tunnels
and subterranean grottos might have found the risk very manageable, as their
level of vulnerability would be low while both the threat and magnitude
were high.
Those with homes and businesses at street level, on the other hand, might have
realized both threat and vulnerability were high and skedaddled, or at least —
in order to reduce the magnitude — sent their children and precious
possessions off to family in Rome.
They could also have looked for submerged
risks
— secondary and tertiary risks that are unseen on the surface, but that must be
teased out before a true picture of risk can be painted. This is a critical
aspect of risk that almost every method and formula misses completely.
Finally, some threats are constant — making the notion of likelihood obsolete.
For example, we know with certainty that the planet will be warmer. That is, the
likelihood it will warm = 100 percent. In cases like this, where threat =
100 percent, including vulnerability is essential — as we see when people,
governments and businesses take actions to reduce their vulnerability to the
effects of the climate crisis, such as relocating away from the coast or
building higher seawalls around their cities.
For a more thorough explanation of our risk model — and a bit about a tool we’ve
built that automatically visualizes all of these risk factors — see our longer
article, “A Better Way to Think About
Risk.”
Published Oct 5, 2020 2pm EDT / 11am PDT / 7pm BST / 8pm CEST