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Views from the Prairie

December 12

Perception of Risks and Opportunities

As human beings, we have a hard time properly perceiving risks and opportunities. We often ignore very real risks and suffer consequences. Youtube is full of teenagers suffering consequences as they attempt some stunt and fail. Americans have a long history of taking odds that others haven't. Yet, as managers, we do better when we can properly evaluate risks, but there are major challenges to doing so.

The financial crisis of 2008 was triggered by a large number of people totally missing the risks that they were taking. This is a common human tendency. As human beings, we ignore risks and we assume that the opportunities are better than they really are. Thus, we strike out on new ventures, homestead new territory, and make investments on the hope that things will be better.

From a management perspective, this optimism in others means that we have to be pessimistic about new ideas, new ventures, and new projects. People promoting their project will over promise and under estimate the risks.

Our natural tendency to gamble is part of the problem. The whole casino business is based on most people not knowing probabilities and risks. People gamble on hope instead of rationally looking at the risks. The few people who analyze the odds have made a lot of money from casinos (until they were banned).

When risks become complex, the situation gets worse. When faced with two risks, we avoid the simple risks and take the complex ones. We pay complex costs and avoid simple ones. Thus, New York avoided paying the cost of moving electrical systems up until the recent storm flooded them all. Now, building after building is moving the electrical systems out of their basement. Weeks of being without power to the building convinced the owners of the risks of future storms.

Often the way that we select which risk to take is based on beliefs rather than a realistic comparing of the risks. The Amish are known for avoiding smoke and carbon monoxide detectors and thus, taking the risks of fire. They see the risks of conformity as greater than that of fire.

Software development is full of issues with risk. Developers are notorious for under estimating the effort needed. They over estimate the time and resources available for work on a project. Thus, one "rule of thumb" in the software business is to take a developer's estimate, double it, and move it to the next larger time unit. Thus a one day developer estimate becomes a two week project. These estimates still are generally off. One study of such estimates showed that most were still off by a factor of 50% with both under estimation and excessive optimism.

Humans will take risks. People in poverty will risk their lives to go to a place where there is an opportunity to do better. We will send sons off to war and mothers will lose their sons to fights and battles. The real challenge is deciding which risks to take.

This imbalance poses a major ethical risk. Unethical sellers have hidden information, overstated the possible rewards, and not told buyers about the risks they were taking on. The biggest recent example was how the financial meltdown was triggered by the selling of bets that housing prices would not go down (even though places were being badly overbuilt and history has many examples of housing price declines). Those who sold those bets made a lot in the short term, but the buyers lost a lot of money.

Similar situations have happened with the buying and selling of companies. HP has lost a lot of money by purchasing companies that overstated their profitability and future growth (and, yes, HP has sued a number of sellers).

Adaptable Companies

With Hurricane Sandy and then a blizzard the week afterwards, New York and New Jersey have had a one - two punch of natural disasters. How would your company fair when faced with a couple of nasty events?

Coping with major natural disasters requires both a resiliency of the core organization and corporate adaptability. The resiliency is how the core functions keep going even when resources are no longer available. Adaptability is how people get replacement resources, connect things in new ways, and figure out different ways to get the important work done.

A number of companies are practicing disasters where they test what happens when major parts of their IT network go down. These tests have exposed a number of problems and shown how creative people get when trying to make the important work happen. One example was with one corporation where the system that was taken down included the special purchase authorization. One employee managed to put a six figure charge on their personal credit card to keep the rest of the organization IT system going.

Adaptability at the corporate level starts at the top of the organization and goes down from there. It starts by attracting people who have flexible and creative minds. It continues with offering them bold ideas, bold goals, and the freedom to choose their own way to achieve those goals. Often, the freedom to change the "corporate way" is the most important part of surviving disasters.

Have you tested your disaster planning? If not, there are sure to be problems with it. Do you want to find the problems before the storm or during it?

Risky World

Daily we get reminders that there are edges to civilization. Between the wars, natural disasters, and petty criminal acts, there are the special events that show that not everyone wants to be part of civilization. The edges seem even closer while on the Internet.


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Prior Years

  1. 2008
  2. 2009
  3. 2010
  4. 2011