The Risk of not acknowledging risks

Have you ever wondered about who takes risks? No – I am not talking about the stock market savvy operators or mutual fund investors who pride themselves on their ability to spot market trends and cover themselves intelligently.

Every living being – consciously or unconsciously – is taking risks by the minute. Even animals in the jungle like lions and tigers take calculated risks while attacking their prey. The lions judicially stalk away from the ‘kill’ when there is a whole herd of wild bulls ready to protect and fight for one of their herd when they see a possible attack. Human beings in their lives are taking risks constantly – whether while crossing a busy road or exposing themselves to a virus attack when they mingle in crowds without a mask during the COVID-19 pandemic.

To say “freeze” in times of uncertainty is like committing hara-kiri and “action is better than inaction”. Don’t stop taking business risks – the golden rule is “no risk, no reward”– but ensure that whatever risks you do take are in line with your strengths and does not highlight your weaknesses.

Risk is different from uncertainty. Uncertainty is the unknown or unknowable probabilities. The problem lies when you try to analyse or try to assess uncertainties that may or may not happen – like the question of whether the world would come to an end in 5 years from now or whether human cloning would be possible or whether COVID-19 will hit again if we don’t have an effective virus in the next 2 years.

The human brain likes to take comfortable decisions when situations can be seen clearly in black and white. It likes clear “cause-and effect” relationship, not grey shades. The recent COVID-19 pandemic has introduced a sense of fear and doubt about our decision making:

Why this would not work?

  1. The “denial” mode: There are some organizations and individuals who are in the ‘denial’ mode on the possibility of the dark approaching side of risks, that nothing untoward would happen and that it would pass away soon. Lowrance (1980) observed, ‘We simply commit the sin of pride when we think we have been so smart as to have forestalled absolutely every possibility of failure.’ They think that their business plans are fool-proof, based on well calculated models and have the buffer to take hits, that their customers are loyal and their cash flow is predictable.
    • There is no reason to believe that your existing loyal customers will behave the same way as before the pandemic. When faced with alternatives that are innovative, they may switch their choices – a case in point is the boom in online retailing and contactless door delivery for practically every consumer item.
    • Even if you have confirmed orders, let’s say for capital items or machinery or spare parts for your customers, there is no certainty that the customers’ survival plan is assured and their cash flows are robust to meet commitments – cancellation or postponement of order delivery can in turn hit your business hard.
    • Your supply chain is critical for your success and that is difficult to predict the probability of delays or failure.
    • Your cash reserves and cash flows would be put to strain and to what extent of time it would hold out without hurting your survival in future is not something that can be predicted accurately during these uncertain times.
  2. The “traditional thinking cap” mode: A time-tested, traditional way of assessment of existing or approaching risks has no relevance when an unknown pandemic hits your business out of the blue and the whole world is grappling with it. By adopting an overly conservative attitude to risk assessment may be to deny the potential benefits to shareholders, employees and society”. Out-of-the-box thinking is required to stay afloat in business. Why would the traditional methods of assessment not work?
    1. Models and scientific formulae do not work when you have incomplete and ambiguous information. Most of the decisions have to be more human – like intuition, experience and wisdom from past knowledge.
    2. Business organizations are in a dilemma whether to continue to stock inventory or down the shutters on purchases, because there is no certainty on when the situation would ease. There are 2nd and 3rd waves of the pandemic surfacing in many countries.
    3. Normally businesses who follow the traditional approach, would like to take the path of cutting losses by closing down temporarily (or even permanently) since they are not sure when the uncertainty will pass, whether their workforce would return to work, whether their suppliers and customers are still in business, etc.

Several organizations in the Information Technology and service industries have been offering “work-from-home” (WFH) options even before the pandemic struck. In a sense they are prepared to move the option to cover their entire staff to WFH to ensure their safety.

3. The “Innovative, out-of-the-box thinking” mode: These business organizations are known to encourage innovative thinking at all levels during normal times.

Good leadership can spot risks that can be converted to opportunities, capitalize on them and create wealth in times of uncertainty. A case in point is the e-learning platforms and online services that has made education at various levels and various topics possible. Universities, colleges and schools have now the discretion to announce course studies that require physical attendance and those that can be done through remote learning.

Innovative online retailing, sales and delivery can be seen not only by big giants like Amazon and Flipkart, but even by small and medium businesses who have cut down costs in stocking and warehousing, enabling digital modes of payment, etc.

Innovative organizations usually assess their “risk appetite” by asking themselves questions like – – what is the worst that could happen if I pursue this opportunity? How much will I lose? How long will I have to pay out to ultimately reap the benefits?

In summary, don’t look at risks in a “negative” sense that they could produce losses there is the other side to the coin and that is risk seen as “positive” can help you seize a new market and be ahead of your competitors. Innovative and out-of-the-box thinking can help create wealth even in these uncertain times.

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