Daniel Kahneman’s 2012 popular bestseller “Thinking Fast and Slow” is based on over 30 years academic research into decision making under uncertainty and has a large dose of practical heuristics and biases within its pages. It’s a great read. Get someone to buy it for you if you haven’t read it.
Hot on the heels of the success of Kahneman’s book it now seems that those responsible for UK competition policy are being encouraged to take more account of the impact of heuristics and biases and other behavioural economics effects. A new book by UEA’s Centre for Competition Policy (CCP), launched tomorrow on 27th November 2013 at the Competition Commission, offers an interesting set of perspectives in this area.
You can get a free download of the book at: http://competitionpolicy.ac.uk/ccpbook and it is worth a read if you have any interest at all in the many influences on our bounded rationality and flawed decision making powers. I’ve recently finished teaching my MBA course in Strategic Risk Management and it is surprisingly easy to make people doubt their rationality after exercises in such things as anchoring, and framing! Both the Kahneman and CCP books will help us all understand why this is.
Tomorrow I begin teaching the Strategic Risk Management module for the seventh year to UEA MBA students. I hope they will be as successful as previous cohorts.How have things changed over these seven years? Well, when I began teaching this module in 2007 the agenda was driven by compliance. Enron and Andersen were still in recent memory and Enterprise Risk Management (ERM) was the great hope for transparency. In 2013 compliance is still important but the whole uncertainty and risk management agenda has become much more strategic. Companies are beginning to recognise how managing uncertainty and risk is a source of new value in a rapidly commoditising world. Chief Risk Officers are beginning to become much more than the insurance buyers for their organisation. They look after ERM systems… but these have proved much easier to talk about than implement. A new toolkit is emerging but slowly.
There is no doubt that the risk agenda has influenced strategy. Even the vocabulary of SWOT has been affected. What used to be opportunities and threats is now often seen as opportunities and risks – sometimes without an understanding of the nuances between risks and issues and threats. There you go – the SWOR analysis shows the integrations of the risk and strategy agendas. That is provided you take the old fashioned view of risk as simply negative and are happy for issues to take over the threats part of the analysis (because they are immediate) and care less for the “distant” Black Swan risks which will destroy you. Given the shift to short term thinking and agility perhaps that is an appropriate response? Still much for my students to discuss in this area!
Have things changed? Is risk more better managed and controlled? Well we certainly have more awareness of world of uncertainty and risk but scandals continue. And I’d put my money on them continuing into at least the forseeable future and probably longer. Why? Because as markets mature and both consumers and industrial buyers are able to compare competing offers easier then one of the only sources of superior profits is likely to involve taking risks with other people’s money (e.g banking) or even their environment (e.g. fracking).
Strategic risk management? Still worth contemplation in a holistic way across the C-suite. There’s profit and disaster in them there risks!