Risk & Decision analysis – it’s not a dark art

The recent turbulence in the global economy has projected the word ‘risk’ into many everyday conversations, both commercial and personal: the unacceptable risks taken by fund managers which led to the collapse of major financial institutions; companies risking bankruptcy as a result of recession; the risk of people losing their jobs – and potentially their homes; and so on. 

As a result there is also increased talk of risk analysis, which in turn has brought disciplines known as ‘quantitative risk management’ (QRM) and ‘decision making under uncertainty’ (DMU) firmly into the business zeitgeist.  But for many small to mid-size companies, QRM and DMU are still regarded as something of a dark art and one that is not relevant to their day-to-day activities.

The truth is, that in boom or recession businesses make decisions every day – each with an associated level of risk.  Much of this decision making is undertaken by looking into the issues facing a business, putting some numbers on them to calculate their impact, and then mitigating or allowing sufficiency contingency in the event that things go wrong.

Examining business decision-making in detail shows us that most businesses could benefit from making the link to risk analysis, and from there taking a more strategic approach to the discipline. Cost estimation, budgeting, cash flow forecasting, operational risk assessments, sales forecasting – in fact any part of a business where there is uncertainty can all be made more robust and meaningful.

Recession has brought the idea of QRM to the forefront of business owners’ minds.  Essentially it is a valuable aide to making better, more informed decisions where the amount of uncertainty on which they are based is known. 

Risk analysis is no longer a dark art, but in today’s economic climate, is an essential part of the business decision-making process, no matter what size the organisation.

In my next blog we’ll look what technology is available today that will help businesses making better decisions now and in the future.

Craig Ferri
EMEA Managing Director of Risk & Decision Analysis

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