Tuesday, March 8, 2011

The Problem With Risk Management

The menace of global terrorism has been labeled the greatest threat to western civilization since communism and yet swimming pools, peanuts and lost deer kill more Americans every single year. 
Paul Joseph Watson

Risk management in the 21st century isn’t working. Given the issues I’m about to describe it’s more amazing when we get risk management decisions right than when we get them wrong. The problem with risk management per se, isn’t our risk management systems – it’s the squishy organic bit in the systems. The human being to be exact and to be even more precise it’s the human brain which causes most of our trouble with managing risks in this complex world of ours.

I’m not suggesting that it was always thus. Once upon a time we lived in small communities where the biggest risks we faced were which food was safe to eat and which animals looked upon us as food. Over the course of the 100 million years or so that we lived like this, we developed a wonderful risk management system. It’s known colloquially as the ‘fight or flight’ response. Originally discovered by the great Harvard physiologist Walter Cannon, this response is hard-wired into our brains and represents a genetic wisdom designed to protect us from harm. The response mechanism lives in an area of our brain called the hypothalamus which when stimulated, initiates a sequence of nerve cell firing and chemical release that prepares our body for running or fighting. So far so good. An ideal system for defending ourselves and our clan from attack or avoiding the sabre tooth tiger.  The hypothalamus is controlled by the Amygdala, a part of the Limbic system which in turn is responsible among other things for the processing and memory of emotional reactions.  It’s only the size of an almond, and yet it has the ability to manipulate the entire body with its stored impulses.

Unfortunately for the amygdala we live in a vastly more complex world than that of our Neanderthal ancestors. We drive cars, operate computers, ingest artificial carcinogens and face issues of international terrorism, climate change, balancing healthcare budgets, investing in education and many more risks which the limbic system simply isn’t equipped to face.  Luckily we have been developing another risk management system in parallel to that 100 million year old fight or flight response.  It’s called the neocortex and it is well suited to complex analysis, logic and statistical modelling that we need to deal with modern risks.  Sadly, at only 2 to 3 million years old the neocortex still basically in the equivalent of beta testing.

Now if both these parallel systems played together nicely we wouldn’t have a problem. The sad fact is that they generally don’t. The ancient system (let’s call it ‘feeling’) where we make decisions based on emotion is lower down the brain stem and it’s fast, fast, fast at making decisions and reacting. The neocortex (let’s call it ‘reason’) needs data and time to make an assessment and is a more complex piece of work generally.  ‘Feeling’ therefore is in pole position to hijack the workings of our mind and take over our risk management decision-making – and usually it does. Even for risk professionals, using ‘reason’ to assess risks takes training and discipline. In a nutshell, when it comes to risk management, it turns out that we make most of our decisions based on emotion rather than being the nicely logical beings that we would like to think we are.

Not convinced yet?  OK then. Why do polls regularly show that people are more scared of terrorism than heart disease when heart disease kills roughly 1,000 times more people per year?  It is the conflict between these two risk management systems (head and heart) that explains why most people are more scared of sharks than diabetes, despite diabetes killing approximately 75,000 Americans per year and sharks having killed 50 Americans during the past 339 years!

If it were just being scared of going into the water we probably wouldn’t really care.  But it’s more than just an aversion to swimming. Big decisions get made on small issues and our political leaders have learned to exploit our fear based decision making to garner support for their preferred initiatives. To be fair to our leaders they are somewhat stymied in their ability to fund the right initiatives due to most peoples difficulty in understanding the true risks.  Sadly, as a result there is public support for spending trillions of dollars and countless lives on initiatives such as the ‘war on terror’ yet little if any support for prevention of heart disease, road safety, disaster management and a multitude of other issues that are manifestly more significant.

Have a look at my next article for 'the answer to the problem with risk management'.

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