You should rethink your perception of Risk

You should rethink your perception of Risk

The way you think about risk needs to change.

However, before you do that, we need to understand what Risk isn't.

Actions that have very high downside, but limited upside do not quality as capital R Risk. They are reckless. This includes all sorts of actions that we take from day to day. Excessive drinking and smoking. Engaging in drugs. Driving carelessly.

This isn't the type of risk that we are referring to in this article.

Instead, what we are referring to is the 3-D risk model.

This model helps provide a theoretical framework to judge how risk should be assessed for any decision. Instead of linear, flat decision making, you need to engage in multi-lateral and 3-dimensional actions. This means including second and third-order effects on your business and your environment.

This model will help provide a new way to assess problems and help you make more preeminent decisions.

I call this, the 3D risk model.

Let's start from the beginning

Start from the center.

In any decision, the most important risk you need to assess is the risk to the core business proposition. This is anything that involves the core value offering of a business, and how the action will impact that.

In other words, if you are making a change, you need to make damn sure you aren't deviating from what your business stands for. If you hurt the foundation of your company, you might bring the whole business down.

To give an example, let's say you are the CEO of Facebook.

The core offering of your business is selling attention to advertisers through bringing value to consumers in the form of a social networking app.

If you make any decision, you need to make the right decisions that won't jeopardize or put this at risk.

For example, if Facebook has a proposal to invest $1 billion dollar in the hot dog business, then the level of risk would be immense. It would have to be an incredible opportunity to tolerate this level of risk.

Most employees would not have to make decisions at this level of risk. Generally, decisions of this level of risk are largely within the scope of senior executives.

Moving out one level

Moving up level, we now start to think about the risk that any decision poses to the consumers of the business. At this stage, the surface area increases broadly as there are more vectors where company decisions can impact the consumers, either positively or negatively.

To go back to the Facebook example, there are many types of decisions that would fall in this bucket. One example is decisions that impact consumer attention on the platform. This could include changes to the Facebook feed, or other sensitive real estate on the platform.

Any time you make a decision on sensitive interfaces where consumers interact with your product, you need to make a very clear pros and cons to justify the opportunity. However, as you go up the ladder of risk taking, you not only have to take into account the risk of the circle you are in, you also have to ensure that lower circles are also accounted for as well.

Therefore, if you have to change the facebook feed, you not only need to account for the risk to the consumer, you have to account for the business as well.

Don't forget people, economy and country

‌At the highest level, we now start to think about the risk that any decision poses to the public, economy at large. At this stage, the surface area is now so large that the possibilities become much larger than the lower two circles. Most small companies will not need to consider this in too much detail. However, as companies grow substantially, they find that this becomes a larger and larger component in their decision making process.

Circling back to the Facebook example, think of how the decisions impacting this circle may have changed 15 years ago to now. 15 years ago, Facebook executives were mainly preoccupied with the first two rungs. There were not many opportunities to change or impact the world around them, given they were mostly preoccupied with perfecting the consumer experience.

It's rare that decision makers will have to incorporate this into their decision making. This is largely the domain of very senior executives, and in companies at the highest level of success. This is also a reason why big companies move so slowly.

Not only do they have to make large expansive risk-adjusted decisions incorporating these stakeholders, you have to also ensure that the latter two rings are also incorporated.

The difficulty now becomes what is the most important level. While the ethical thing to do is to ensure that wider externalities, such as the people and country are well taken care of, you will find that often the lower dimension stakeholders have more importance.

This is often the reason why big tech and industry giants are often so focused on driving profits, and seem to ignore the people. The decision makers at the most senior levels of these companies have chosen their priority in this 3-D model, and this guides and explains the behaviours of these companies.