The 6 key mistakes executives make in risk management

By now, every executive in business recognises the term “Black Swans” as representing low probability, high impact events. However, many do not know how to handle them in ther management of risk. There is an HBR article by Taleb, Goldstein and Spitznagel discusses the 6 most common mistakes made by executives in this regard. Summarising the article ….

  1. We think we can manage risk by predicting extreme events.
    The advice is NOT to try and predict these Black Swan events (which by definition is impossible), but rather try and identify your vulnerabilities and focus on the consequences of these events and how to withstand them. What my colleagues in Consileo call “building resilience”.
  2. We think by studying the past we will be better able to manage risk.
    You cannot use hindsight as foresight as paste events do not bear much resemblance to future shocks. I do not think the article is saying that nothing can be learned from  the past; but rather that Black Swan events cannot be predicted using past trends and happenings.
  3. We don’t listen to advice about what we shouldn’t do.
    We tend to like positive advice far more than negative (loss prevention) advice and so give greater weight to the positive advice.  A dollar not lost is economically equivalent to a dollar earned, but risk managers don’t treat them equally.
  4. We assume that business risk can be measured by standard deviation.
    Although statistical techniques are useful in concepts like investment risk, they are dangerous in real life where events do not follow a normal distribution. The article also claims that even many quants analysts do not really understand the concept of standard deviation and so what is the chance that non-experts are  going to get it right.
  5. We don’t appreciate that what’s mathematically equivalent isn’t psychologically so.
    Here the authors demonstrate that how the same risk is presented can significantly impact on how we react to it. They are basically discussing the concept of framing and our heuristic-driven response to different descriptions of the same thing.
  6. We are taught that efficiency and maximising shareholder value don’t tolerate redundancy.
    Basically here the paper highlights how too much optimisation can increase an organisation’s vulnerability. To demonstrate this, a “lean” human being would only have one lung and one kidney!

The article ends discussing the risk of incentivisation if structured incorrectly. I really like their conclusion here which is so appropriate in light of the financial-system driven crash we are trying to recover from; and even the news of the last week where JP Morgan have announced a $2bn trading loss (which I suspect may only be part of the true picture, but we will see …):
“Moreover, we shouldn’t offer bonuses to those who manage risky establishments such as nuclear plants and banks. The chances are that they will cut corners in order to maximise profits.”

The full article may be found at the Harvard Business Review web-site at
The 6 mistakes article
although you may have to register to download it

A while ago we wrote an article called: Taking strategic decisions in the face of “unknown unknowns” which complements this risk article nicely and gives some advice about what you could actually do to address some of the challenges put forward by Taleb.

Decisions in the face of uncertainty

If you would like to discuss how we may assist you and your organisation in addressing critical risks and building resilience, please drop me a line at sgifford@genesis-esp.com

 

A Boardroom Fable – Making Better Decisions

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A Boardroom Fable
How Gail saves the company and Brad saves his reputation

Taking strategic decisions in complex environments is one of the toughest, and most important jobs, of any Executive in both the public and private sectors. Taking good decisions can result in massive value creation, but getting it wrong can equally destroy value – or even destroy a company.

View this entertaining slide show that tells the story of the company: Marcon, and its CEO, Strategy directorBrad and simultaneously offers excellent advice on taking strategic decisions.

Making Better Decisions – A Boardroom Fable

 If you prefer, you can view the slideshow on this page (scroll down); or alternatively, you may download the presentation by completing the form at the bottom of the page.

Please feel free to share this with colleagues and friends and help us help the world in:

“improving lives through better decisions!”

If you are interested in buying our manual on The Genesis Decision Making Process with best practices in decision making – please click here:

Genesis Decision Making Process

Download it after sharing a few details with us:

For all enquiries, please contact Simon Gifford at sgifford@genesis-esp.com

Strategic decision: how to select and hire management consultants.

“Dangerous liaisons”.
The decision to hire (or fire) management consultants.

A major decision that organisations occasionally face is whether or not to hire management consultants. And if so, how to go about it to maximise value from the process.

Using Genesis Management Consulting’s strategic decision-making process and input from experts on the subject (from both sides of the table), we are pleased to offer an article describing the process, how to go about it and some of the pitfalls and consultant “tricks” that you may encounter.

How to optimise value when selecting and hiring consultants

In addition, we are publishing an interactive pdf which contains all the information in the article plus some extra data such as consulting pricing models and questions to ask consultants in a short-list interview. This is a useful tool as you have all this information structured in a highly accessible manner on one page. All you need is Adobe 9 (free from Adobe) to read and navigate the document.
We are distributing it for a nominal price of £3-50. If you would like to buy this click on the button below, pay via PayPal or credit card and have the article within 12 hours.
Dangerous Liaisons Interactive pdf

If for some reason the link does not work, drop me a line at sgifford@genesis-esp.com and I will arrange for you to receive the article.

Making strategic tension work!

Here is an interesting and useful article discussing two type of tensions in the boardroom:
Firstly, natural tension between high performance team members, and
secondly, performance tensions.
The performance tensions are further broken down into 3 types of stress:
> Profitability versus growth
> Short-term versus long-term
> Success of the whole organisation versus success of individual parts.

These tensions frequently (maybe always) are present when a senior team is engaged in taking a strategic decision. In my consulting career I have personally experienced all of these types of tensions and seen good outcomes where the pressures were used positively; and less good outcomes where the tensions were not managed as well.
This article introduces the situation well and goes some way to helping us understand how to capitalise on the opportunities presented by these tensions
Business tension and strategic decisions