Like finding a Pot of Gold: When Risk Management Wisdom is found in other Disciplines Imagine risk management was solved long ago, but you must look elsewhere than in the risk management literature, standards, and norms: 𝗟𝗶𝗻𝗴𝘂𝗶𝘀𝘁𝗶𝗰𝘀 𝗮𝗻𝗱 𝘀𝗲𝗺𝗶𝗼𝘁𝗶𝗰𝘀 help shape how risks are framed and visualized to make complex risks easily understandable. Risk communication's impact on decision-making processes is massively underrated, as it intends to influence decision-makers behavior. Stop believing that your audience understands what you report on risks. Start communicating from the decision-maker's perspective. 𝗖𝗼𝗴𝗻𝗶𝘁𝗶𝘃𝗲 𝗽𝘀𝘆𝗰𝗵𝗼𝗹𝗼𝗴𝘆 is how humans perceive and interpret uncertainty, leading to biases. It explores deviations from logic and norms. It explains why risk workshops never lead to honest discussions about risks and reveals why risk managers and decision-makers should be familiar with statistics. Stop judging psychology as an irrelevant soft factor. Start embracing heuristics and biases and equip yourself with this essential skill. 𝗣𝗿𝗼𝗯𝗮𝗯𝗶𝗹𝗶𝘁𝘆 𝘁𝗵𝗲𝗼𝗿𝘆 provides the crucial framework for understanding the likelihood of uncertain situations. Risk managers must understand probability calculations and their behavior in a risk portfolio. For example, the chance that at least one of the rare risks in a risk portfolio occurs is much higher than anticipated. Stop being afraid of random variables, probability distributions, and Bayes’ Theorem. Embrace probability theory to cross-check your probability assumptions. 𝗖𝗼𝗻𝘀𝘁𝗿𝘂𝗰𝘁𝗶𝘃𝗶𝘀𝘁 𝗿𝗶𝘀𝗸 𝘁𝗵𝗲𝗼𝗿𝘆 emphasizes that risk is interpreted through cultural, social, and individual lenses. If companies use qualitative measures, such as "high," "moderate," or "low,” the risk is ambiguous and adds additional uncertainty. The only language to express uncertainty unambiguously is—guess what—math. Stop using pure qualitative measures; use math instead, but not mindlessly. 𝗣𝗿𝗼𝘀𝗽𝗲𝗰𝘁 𝘁𝗵𝗲𝗼𝗿y is based on the understanding that individual risk behavior varies in loss or win situations. Accordingly, individuals do not use our beloved “expectation values” for risk-based decision-making. They assume decision-makers are risk-neutral, but they aren't. In win situations, they are mostly risk averse, and vice versa. Stop using expectation values as a risk measure. Instead, make uncertainty transparent (ranges, distributions). 𝗗𝗲𝗰𝗶𝘀𝗶𝗼𝗻 𝘁𝗵𝗲𝗼𝗿𝘆 is how people or organizations make decisions under uncertainty. Often, companies are unaware of the criteria for making a good decision. Risk management benefits almost every decision quality criterion, and its value-adding aspect is undeniable. Stop running risk management in a silo decoupled from business. Start with the decision problems to solve and make risk management part of the solution. Institut für Finanzdienstleistungen Zug IFZ Lucerne University of Applied Sciences and Arts
Thank you Stefan Hunziker, PhD for this insightful summary of interdisciplinary approaches, especially the first three are something that I constantly ponder over. I think It’s worth adding the "causality theory", another fundamental concept that has broad relevance across various disciplines, including risk management. Understanding the cause-and-effect relationships behind risks is crucial for accurately assessing and mitigating them. Causal chains and networks, coupled with counterfactuals can help risk managers go beyond probabilities and statistics to develop more robust and actionable strategies. Great post overall—thank you for sharing! 🤗
Stefan Hunziker, PhD Unfortunately, risk management is often perceived as boring and somewhat outdated. And indeed, this is probably the reality in some organisations. However, if it is understood in its necessary depth and diversity, it becomes a highly exciting field. The interdisciplinary approach in particular is not only important and effective in practice, but also capable of attracting bright minds. A grey duck becomes a swan ( a white one 😊).
Holistic Business Risk Pioneer I Fractional CRO I Hands-on System Changer & Researcher
8moStefan Hunziker, PhD, great post! When I was working on my PhD research, it was challenging to resist attempts to lock my work in the finance domain. To answer the question of how risk management manifests in management practices, I connected organizational, socio-behavioral, and finance studies. The only way to translate ERM concept into value-adding practice is to establish the lost connection between business and risk management. This is the core of the holistic approach that we share.