Uncertainty": "risk" without the attitude

Citation

Leitch, M. (2005), "Uncertainty": "risk" without the attitude", Journal of Risk Finance, Vol. 6 No. 2. https://doi.org/10.1108/jrf.2005.29406baf.003

"Uncertainty": "risk" without the attitude

“Uncertainty”: “risk” without the attitude

Don’t worry. This is not one of those pedantic articles that tries to redefine “risk” or “uncertainty” for reasons of interest only to the most theoretically inclined risk managers.

This is about the effect that different words have on people who are not risk managers, but need to contribute to a corporate risk management effort.

The usual deaf ear

If you have ever tried leading a meeting with managers in which they have to think about risks and how they are being managed, you know that people tend to ignore the instructions you give them.

You ask for “risks” and they usually start talking about things that are a problem now; i.e. about “issues”. If you want people to bear in mind unexpectedly good outcomes as well as downside risks, you will find it incredibly difficult to get people to do anything other than list potential failures. Try asking for “opportunities”, and they will suggest things that are currently available actions, not things that might open up in future. Try asking for “upside risks”, and something seems to happen in their heads so all they hear you asking for is “risks”.

This is frustrating, especially if you like things to be just right.

A big factor in the success of these meetings is how you deal with this issue. Sometimes people tackle it with sentence templates, training exercises, and rules requiring two- or even three-stage causal chains to be specified.

One risk manager I know takes the opposite approach. Instead of trying to get people to do something that is hard for them, he does a quick exercise to demonstrate that it is enough to talk about anything that is a worry, and that trying to make finer distinctions is largely a waste of time.

An experiment

Recently I carried out an experiment to study a different way of giving instructions, and the results are evidence of another potentially useful approach.

The study was done online. Volunteers who participated were first given a choice among four scenarios likely to be familiar to most people. This was to ensure that respondents would be working on something about which they had some knowledge. (The most popular scenario was “Building an extension to your house”, whereas the least popular was “Planning a wedding”.)

They were then asked to make a list of one of the following:

• •

  “risks”;

• •

  “sets of risks”;

• •

  “risk factors”; or

• •

  “areas of uncertainty”.

The instructions gave no explanations of these terms, but each of the phrases was used three times in the instructions. Participants also were asked to suggest actions that might be taken regarding each list. Their suggestions were analyzed in various ways.

All the instructions that mentioned “risk” produced roughly the same behavior – a list of bad things that might happen and ways to fail. This occurred even when people were asked for “risk factors,” showing that the participants given these instructions either did not notice the word “factor” or did not know what was meant.

There was just one exception to the generally grim approach of “risk”, and that was due to the scenario, not the instructions. The “Buying a company” scenario seemed to nudge people into due-diligence mode and led to them listing areas about which they would want to find out more.

In contrast to instructions mentioning “risk”, asking for “areas of uncertainty” caused many participants to behave differently, writing things that were not inherently good or bad – just uncertain. They also went on to list a slightly higher proportion of actions that involved finding out more or doing more analysis.

When this is useful

There are two main reasons why you might want to ask people for “areas of uncertainty” instead of “risks”.

First, if you are trying to get people to think about unexpectedly good things that might happen as well as the bad things, then “uncertainty” is helpfully neutral. Professors Chris Chapman and Steve Ward of Southampton University advocate the use of this word in project risk/uncertainty management for this reason. The results of my experiment support this argument.

Second, if you want to make people more aware of their uncertainty, then using the word highlights this aspect of the risk concept. The experiment also supported this argument.

People have a blinkered view of the future, and when you help them take off the blinkers, risk management suddenly seems much more worthwhile.

An example: business case templates

Most organizations now have a template to guide employees when they write business cases (e.g. for a project or product). Many templates have a heading for “Risks” and ask people to list risks and what they propose to do about them, or have done already.

This seems like a fine idea, but I would suggest taking a look at what people actually write in this section, particularly in early drafts before negotiations have been concluded. Many people clearly feel that the template is senior management’s way of saying “You are responsible for this project whatever happens. You can’t use unexpected events as an excuse for failure”. The business case writer responds by saying, in effect, “Bad things could happen but the project will still succeed if you give me proper support.”

In this exchange, the focus is on negotiating responsibility, not managing.

Now imagine that you are writing the business case and the template is slightly different. It asks you to list areas of uncertainty in relation to the business case/project and actions that might be taken to manage them and their implications. Feel the difference?

Two personalities of risk management

Dr Jekyll’s approach to risk management encourages people to look at the future with an open mind and behave in accordance with this view. The impact of risk management comes from changing the way people think and the actions they take.

Mr Hyde’s risk management pushes people towards even greater suppression of their uncertainty. It insists that they know their risks in advance, that everything is done to reach the initially stated goals, and that deviation is failure and cannot be excused.

If you prefer Dr Jekyll’s approach to Mr Hyde’s, then “uncertainty” is a useful addition to your toolkit.

Matthew LeitchIndependent consultant specializing in internal control systems. He is an accountant and auditor by background, and spent seven years as an internal control specialist with PricewaterhouseCoopers (matthew@internalcontrolsdesign.co.uk).