In elementary school arithmetic, most of us who want to do well struggle to come up with the correct answer to that problem posted on the blackboard. Unfortunately, that’s the way many grown-up decision makers approach risk management. At a recent Palisade Users Conference, v.p. Randy Heffernan offered up some fun and insightful comments about risk analysis and the need many managers seem feel to boil risk assessment down to a single "correct" answer–the Number.
The Number, he points out, harbors a number of evils that bedevil rational decision making. The reason for this is that risk is, by definition, uncertainty, and uncertainty is often a compound of a number of unknowns. Uncertainty embodies many possible outcomes or answers. Trying to identify a single resolution to uncertainty leads to simplistic and often dead-wrong answers. Randy points out that the way to get the best of something as vaporous as uncertainty is to use probability or–in the case of multiple unknowns–probabilities.
A probability expresses a range of outcomes or numbers, and this, Randy proposes, allows the risk manager a fuller understanding of any particular course of action. "It means thinking in two dimensions," he says, "not just ‘what if’ but ‘how likely.”’
Almost every well brought up manager thinks risk analysis, the process of quantifying risk, is important. But there is more than one approach to quantification, Randy counsels. If you want to do really useful risk analysis, forget about coming up with The Number and concentrate concentrate on seeing the range of possibilities.