Your assessment of risk.

The main difference between uncertainty and risk is that risk can be measured. Once measured, decision makers can assess the importance of one risk against another and if necessary, allocate resources to reduce either the likelihood of the event occurring or the consequences if it does occur.

The assessment of a risk is influenced by the degree of choice available in accepting the risk. The more a person feel they are in control of a situation, the lower their probability assessment. But, too often, risks are only viewed as a hazard, breakdown or failure to deliver.

As risk is usually associated with failure, there can be a personal fear about actions taken to overcome a perceived risk. This can lead to those considering risk in an organisation to lower their assessment of a risk and therefore not invest in mitigation.

An example occurred this in the Australian coal industry, where ‘black lung’ disease among miners was reported. This disease has not been seen in the industry for more than 30 years; so, for an individual miner, the likelihood of getting the disease is low; but the consequences are high (a slow and painful death). How would you rate the likelihood and consequences for a government and mining company?

The actual situation was that with no reported cases, the government mines department no longer employs specialists to view the chest x-rays taken of miners every five years. (a cost saving). Also, mines inspectors did not enforce the dust level regulations, so mining companies reduced the amount of water used to stop coal dust (a cost saving measure). The miner’s trade union noted that the x-rays were done, so did not review the process (a ‘tick the box’ bureaucratic approach).

With the new cases reported and the likelihood of expensive legal settlements, all involved absolve themselves from blame (the finger pointing approach).

Deciding between acceptable and unacceptable risks

As noted, if individuals feel they are in control of a situation they lower their probability assessment for a risk. This even occurs when presented with facts that show an alternative view; for example, it has been shown that air, rail or bus travel are safer than driving a car, but people still prefer to drive.

Do not confuse probability of an event occurring with the consequences if it does. Risks that are perceived to be of higher likelihood or higher consequences may receive more attention, but these may not be the most critical for your organisation.

The coal industry example shows that the consequence for government and mining companies of saving costs rather than enforcing the regulations, is likely to be high legal costs. But managers making a risk assessment are more likely to consider only the short term consequences to themselves and their group, rather than the organisation or wider community.

How to not get into this situation? When embarking on a risk assessment, team members should understand how psychological factors may affect their risk assessment. Therefore, adopting a method of measuring risk attitudes can be a useful part of the process. This is useful, because a person’s emotional response to events or prior decisions concerning risks can become ‘predictable’ over time; they are also able to provide ‘rational’ explanations to justify their approach.

So, your supply chain professionals should be rated as either risk taking, risk neutral or risk averse. These are not negative assessments against a person, but allow a weighting to be placed against their risk assessment.

Examples of emotional responses when making risk assessments include:

• ‘Bandwagon’ effect – the decision is correct because ‘everyone else does it’
• Emphasis on quantitative analysis – allows for disregarding other areas (such as cultural factors) that are more difficult to assess
• Emotional bias – accept what makes a person feel good and ignore things that leave a bad feeling
• Expectation bias – believing a decision is correct without evidence or analysis to support it
• Loss aversion – as losses, rather than gains, can affect a person’s future in an organisation, make decisions to avoid a loss
• Selective effort – micro management of ‘safe’ areas and ignore difficult areas
• Sunk cost influence – when previous decisions concerned with the event have led to loss, decisions become more pessimistic
• Peer pressure – make decisions that are acceptable to peers; adhere to the ‘corporate way’

Measuring your attitude to risk assessment can reduce the likelihood of long term misplacement of risks. This means rather than focusing on events with a high probability risks but low consequences, addressing events with low probability, but high consequences if they were to occur, .

Supply chain professionals will make mistakes and have biases when making decisions. Be aware when this can happen and that your perception of risk can influence the perceptions and attitudes of your group or team.