Tag Archives: black swan

Recently I had a discussion with a friend who is a colonel in the Army about the culture of risk among senior officers and, by extension, in management.  The culture of risk is an important question for any organization.

To understand the culture of risk, we must first distinguish between two types of risks.  Type One risk is where you do something that leads to an error or a bad result.  It’s a reasonable assumption that the majority of our time in school and in higher education is designed to teach us how to reduce such risks.

Type Two risk is the opposite, it is the risk of not doing something that could be valuable.  Of course, the two are linked:  the more one reduces the risk of doing something, the more one increases the risk of not doing something valuable.  The trick, unfortunately, is that we tend to focus more on the Type One than Type Two risks.  On one level, this makes sense:  after all, failure is very visible – a disaster, a lost war, a failed product launch, etc.  In contrast, forfeited opportunity is invisible:  we do not see what valuable things our caution has prevented us from doing, and no one is punished for not having invented something.  Our education, liability laws and corporate governance structure push us towards a culture of Type One risk avoidance, i.e. to reduce the risk of failure (Sarbanes-Oxley anyone?).  This obviously is a problem for innovation in the long term, but it doesn’t even reliably protect us.   If it did nothing else, the financial crisis that began in 2008 has demonstrated that those institutions entrusted to manage risk failed to do so properly.  In short, we focus on risk avoidance at the expense of opportunity creation, and we don’t avoid even risk very well!

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