The Rulebook of Risk - Opening Chapter
The Rule Book of Risk - Opening Chapter
Preface: In my line of work, being a researcher for an executive search and talent sourcing firm, managing risk is paramount for our Client’s success. That is why I’m making a series of blogs about how companies can mitigate, eliminate and manage risk when it comes to sourcing new talent. Since I’m based in Finland, some of the examples are from here, but everything mentioned in these blogs are applicable anywhere when it comes to people.
Every decision you make in life has risk. Whether it is driving your car to work, hiking in nature or cutting vegetables in a soup, risk is involved. We think we’re good at managing risk; after all, if you are reading this, then congratulations; you have made it through life without fatal accidents. We weigh the negatives against the positives in everything we do and decide whether something is worth doing or not relative to the action’s risk factor. You drive to work every day with the confidence that you would make the trip unscathed, after all you have done it many times before and don’t consider it to be risky. If something would change, say for some reason the only way to get to work would be your five-year-old nephew driving you there, you may reconsider your need to get to the office by car.
This all sounds logical, but perceived risk is very different to actual risk. Numerous scientific tests have shown that people’s risk tolerance varies hugely and is only loosely connected to actual risk. If you would want to go hiking in nature, you would perceive it as a fairly risk-free activity, but if you would go hiking in a place where there is known to be bears for example, you would increase the risk factor in your mind and probably not go. You would ignore the fact that bears generally avoid people and almost never attack them. Statistically, you should be more afraid of cows than bears, because cows have caused 12 times more deaths than bears in Finland in the past 20 years. Still, most of us would much rather walk in a field of cows than a forest of bears. So why is our risk tolerance so skewed? There are three main rules when it comes to risk.
RULE 1: People are much more tolerant towards voluntary risk than involuntary risk.
Say you live in an area where there are factories polluting air. Now let’s say that the toxic air is a probable cause for lung cancer, which one of your neighbors has. Living in proximity to the air polluting factories might seem like an involuntary risk, after all you can’t just stop breathing air. This kind of pollution would not be tolerable for you and you would try to change things. Now let’s say that the factories' owners would offer to buy out the neighborhood and move the people elsewhere. This gives you a choice, a choice that you probably don’t want and a choice that is in no way better than if the factories would just stop polluting. Nevertheless, in your head it seems that you have an option, and the pollution suddenly becomes more tolerable. Most times people only need the illusion of choice for making something socially unacceptable to be perceived as acceptable.
RULE 2: Risk is better tolerated if it affects a small number of people.
In space travel, there is statistically a 5% chance of death. It is worth noting that space travel related accidents don’t happen frequently, but then again there isn’t very frequent travel. If public transport passengers had a 5% death rate it would not be acceptable. Astronauts have a very risky job, but it only affects a small group of people, which is why the risk is tolerated by the general public. An interesting thing to point out is that studies show that in terms of risk of death, disease is the yardstick. If an activity kills more people than disease relative to the number of people affected, it won’t be tolerated. If it kills less, it will be. This is evident also in today’s Covid-19 death toll; people tolerate the deaths of the virus, because they feel there is nothing they can do about it. In the end of September, the death rate for Covid-19 in Finland, a country with one of the best and most accessible healthcare systems in the world, is 3,5% from all confirmed cases. To put that into perspective, 1,8% of American soldiers who fought in Vietnam perished, making Covid-19 in Finland statistically more dangerous than the Vietnam war for American troops. With these facts pointed out, would you rather be on the draft list in 60’s and 70’s United States, or walk in public places without a mask on in today’s Finland?
RULE 3: Things we don’t understand is perceived as risky.
Things we now take for granted such as trains, electricity, the telephone and a mass of other inventions scared people all around the world, because they were new, and the general public didn’t understand how they worked. When nuclear power was invented, people perceived it as a very risky form of producing electricity, even without any major accidents. Fast forward to today and nuclear power is much more acceptable, even after there have been minor accidents and a few major ones, too. Almost every other form of electricity production kills more people than nuclear power, yet there are still people who won’t tolerate it, because in their minds it is the riskiest form of electricity production.
Writers closing thoughts: Even if we like to think of ourselves as rational beings, we’re not. It’s up to the leadership of companies to manage risk and set a course of action that leads to business success through well calculated and informed decisions. This is no easy task for anyone, but by carefully learning about the inherent characteristics of risk, the job of decision making becomes much easier, and your organization will prosper.
Jyri Ursem
Researcher
