Managing Some Risks Is A Waste Of Time

Since records began, there have been those who predict the apocalypse and those who are ready to listen and react. Popular media understands and exploits this tendency to the full. To what extent should those in the business world pay attention?

The dire forecasts associated with swine flu are the latest ina series of warnings related to health risks that might disrupt trade. Add to these the growing concerns over severe and extraordinary weather events, or the on-going threats of terrorism, or the possibilities of political instability and the world soon seems a scary place.

So the risk manager faces a daunting task in seeking to anticipate these awful events and work out how to protect against their potential impacts. What should they do?

The answer often is ‘Nothing’. The economic impact of such disasters is typically far more limited than forecasters predict. Activity may slip slightly, but overall economies remain resilient, according to a recent report for the Canadian Finance Ministry.

Of course, this might be because we have become so good at managing these ‘exogenous risks’ (those which occur outside the financial system). But the evidence appears otherwise, at least according to a recent article in The Economist (Cold Comfort, July 25th). For example, the Canadian report found: “People adapt and work around the shock; those unaffected work harder and longer to pick up the slack.” It is this type of finding that is hard for a risk manager to highlight as a reasonable source of mitigation, yet which in reality typically eliminates the risk.

There is no question that events like the Great Plague in the 14th century caused massive dislocation – but in this case, it transformed an economic system, something which even the most sophisticated risk manager might struggle to predict or mitigate. It seems the real risks we should focus on are those which occur within the system – so certainly financial disruptions or those which are localized within a specific supply network merit full attention. But it would seem that those which are media favorites are generally best ignored.