With great uncertainty comes great reward. If you’ve planned for the unknown, when something unexpected happens you’ll be that much more prepared. For those companies who had a strong risk management plan in place at the start of this year, they are likely feeling much calmer about the current state of affairs. If you’ve done the work, all that risk mitigation work is making sense—though this may not be a comfort during these challenging times. After all, when your disaster preparedness work pays off, you’re still dealing with a disaster.
Risk is present in the stock market and even in the supermarket in times of a pandemic. As we navigate the risks of a virus, people around the world are asking themselves how likely they are to be infected in certain situations. What can they do to keep themselves and their loved ones safe and avoid catching it? More than ever before, risk is a consideration before you leave your home. Now you may consider the risks of going to the grocery store. Likely this was not something you thought about before.
In addition to the pandemic, the concept of risk has received additional attention in recent years because of updated quality standards. As you are no doubt aware, risk plays a prominent role in ISO 9001:2015.
In an article for Quality, Aaron Troschinetz explains why risk-based thinking is sometimes misunderstood. “Much has been made publicly about risk-based thinking with the release of the ISO 9001:2015 standard,” writes Troschinetz, the general manager at Smithers Quality Assessments. “However, risk-based thinking, in a majority of business models, has always been there. For instance, many organizations must consider the risk with a new product/service release or the risk involved with appropriately training their employees to work within a particular set of requirements specific to the production of a given product or service set. Two examples where risk-based thinking relative to the ISO 9001:2015 standard are often taken for granted are:
- Risk-based thinking now includes both risk (negative) and opportunity (positive).
- Actions that address risk and opportunity must be “proportionate” to the potential impact on product and service conformity (ref. ISO 9001:2015, clause 6.1.2).”
In other words, don’t define risk-based thinking only in terms of negative outcomes, or worry about overly managing it in every situation.
While risk may be a common concept at your organization, uncertainty may be also gaining more attention. There is a difference between risk and uncertainty, although at first they may seem identical.
Risk and uncertainty are not the same thing, explains Tim Kastelle in a Business Insider article. “When we act like everything is a risk, we greatly increase the chance of failure. However, the opposite can also be a problem: We act like everything is unknowable. Uncertainty often gets blamed for inaction,” Kastelle writes.
“The next time you hear someone mention uncertainty, ask yourself this: How much less do they actually know about the future today vs. what they knew last week or year? How much less do they think they know?”
“We can’t use not knowing as an excuse to not act – because we never know,” he writes. “It seems like we either suppress uncertainty, and act overconfidently, or we overemphasize uncertainty, and don’t act at all. Both are bad outcomes.”
Though it isn’t easy, he offers suggestions on how to manage uncertainty. First, think in volume. Great ideas happen from a number of ideas—not just one. Another is to seek out uncertainty. This is where the magic happens. Innovation requires dealing with some unknowns. By treating risk and uncertainty differently, you will be able to address each better.
This distinction between risk and uncertainty goes back a long ways. Consider the 1921 book, “Risk, Uncertainty, and Profit,” by Frank Knight. This also resulted in the term “Knightian Uncertainty.” According to an article by Peter Dizikes for MIT news, “As Knight saw it, an ever-changing world brings new opportunities for businesses to make profits, but also means we have imperfect knowledge of future events. Therefore, according to Knight, risk applies to situations where we do not know the outcome of a given situation, but can accurately measure the odds. Uncertainty, on the other hand, applies to situations where we cannot know all the information we need in order to set accurate odds in the first place.”
Dizikes goes on to write, “An airline might forecast that the risk of an accident involving one of its planes is exactly one per 20 million takeoffs. But the economic outlook for airlines 30 years from now involves so many unknown factors as to be incalculable.”
This concept of Knightian Uncertainty can affect the stock market as investors are scared away from making trades or engaging in any kind of investment but the safest ones, he explains.
While the future is unknowable, it still helps to plan and anticipate what could go wrong. The more risk mitigation work you’ve done, the less uncertain you will feel about the future. Even in the face of so much change and seemingly unprecedented upheaval, it still makes sense to consider what your organization should do to come out stronger in the future.
After all, as the saying goes, “A ship in harbor is safe — but that is not what ships are built for.”