A Better Way to Think About Risk - HBR.pdf

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RISK MANAGEMENT

A Better Way to Think About Riskby Srini Pillay

DECEMBER 23, 2014

Few people would question the value of risk assessment. Without it, we

would plunge thoughtlessly into situations that could lead to considerable

harm. But upon closer inspection, risk assessment is itself a dangerous

double-edged sword.

There are numerous counterexamples where, at least in hindsight, even a

simple assessment of risk would have killed a business idea that turned

out later to be a huge success. The launch of Facebook, for example, might

not have been justied when MySpace and Friendster were industry

leaders.

So is there a better way to think about risk, especially in fast-changing

environments? I suggest three: 1) understand how the brain processes risk;

2) remember that risk-taking can be a good thing; 3) learn to become an

expert at bouncing back from failure, thus taking some of the sting out of

risk-taking.

1. Understand how the brain processes risk. Recent evidence from brain

science suggests that we need to reframe how we think about risk and that

we need better tools for assessing it. While we all have biases that make us

underestimate risk, and we need to take those into account, new research

suggests that there is even more going on than we thought.

Risk-taking may be conscious or unconscious. When it is unconscious,

you may not be aware of the risk or how you are framing it. In this case,

doing a risk assessment limits your conclusions to conscious factors,

thereby excluding the potential impact of unconscious biases.

Risk assessment may also be driven by feelings. Feelings can obscure

important rational thinking or they can promote it. Even if were conscious

of our feelings, how are we to know which eect they will have when

were facing a big decision?



Furthermore, whether you take a risk or not may be entirely based on your personality. Research has shown that people who are sociable, impulsive

sensation-seekers or aggressive may be especially likely to take risks. So assessing a situation and its risks are not enough. You also have to assess the

nal decision on your propensity to take risks based on your personality.

When I work with decision-making teams, I have used tools to uncover some of these biases. One is this checklist of the psychological traps and

unconscious biases in decision making, and another is Gearshift, an app for dealing with obstructive emotions. MoodKit is a mobile app that also

helps users understand cognitive distortions.

2. Remember that risk-taking can be a good thing. Risk often has inherently negative connotations, which may bias you against taking smart risks.

So make a conscious eort to remember that risk-taking may be adaptive and may even lead to positive outcomes. In adolescence, for example, it may

confer certain advantages because this is when we learn how to adapt to a rapidly changing world. If we consider the college kids lacking business

sense who started Facebook versus the professional managers at NewsCorp who ran MySpace like a business, it is clear whose risk tolerance paid o.

While this does not give high-risk strategies carte blanche, it does point out how risk mitigation can make you fall into a blinding prudence trap and

how taking risks can lead to a big payo. Steve Jobs taking a big risk to open up Apple retail stores despite physical storefronts being a risky business

for computer manufacturers illustrates that a sober risk assessment is far from the be-all and end-all of decision making.

Here, I recommend the opportunity model of change, a tool helps leaders nd opportunities in adversity. This HBR article also details some of the

hidden dangers of being too risk-averse.

3. Learn to become an expert at bouncing back from failure. Many people who have failed due to taking risks have subsequently succeeded. The

brain is rigged for error-based learning, so why shouldnt we become better at experimenting rather than trying to avoid failure through risk

assessment? Steve Blank, whose company Rocket Science Games was supposedly going to revolutionize the video games industry, lost $35 million in

funding. Instead of quitting, he went on to start another company, E.piphany, which resulted in each of its investors making $1 billion.

Even though failure is a badge of honor in Silicon Valley, there are plenty of people who fail in launching new businesses and fade from the scene

completely. What makes one person dierent from another? In large part, its resilience and openness.

Here, I have used a tool called Burnout Buster that measures how early- or mid-stage burnout can hurt resilience and recovery, and a tool

called BEND, which helps leaders develop 16 resilience competencies. HBR has also published several seminal articles on improving your own

resilience: Building Resilience, by Martin Seligman, How Resilience Works by Diane Coutu, and How to Bounce Back from Adversity, by Joshua

Margolis and Paul Stoltz.

The message here is that in our rapidly changing world, our traditional way of thinking about risk assessment is inadequate for business strategy and

decision-making. More than ever, learning new techniques and tools will help us achieve better outcomes in this era of dramatic and disorienting

change.

Risk assessment can be a valuable way of collecting data and structuring reection. But we need to expand our skills if we want to rise to the

challenges and capture the opportunities in front of us.

Srini Pillay, M.D. is the CEO of NeuroBusiness Group and award-winning author of numerous books, including Life Unlocked: 7 Revolutionary Lessons toOvercome Fear, as well as Your Brain and Business: The Neuroscience of Great Leaders. He is also Assistant Clinical Professor at Harvard Medical School and

teaches in the Executive Education Program at Harvard Business School.



Related Topics: LEADERSHIP | MANAGING YOURSELF

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Sai Bhupalam 3 days ago

Great article - I especially appreciate all the links / resources you have included in it. Thank you.

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A Better Way to Think About Risk - HBR.pdf