The Failure of Risk Management: Why It's Broken and How to Fix It

CHAPTER 1

Healthy Skepticism for Risk Management

It is far better to grasp the universe as it really is than to persist in delusion, however satisfying and reassuring.

 

—CARL SAGAN

 

Everything’s fine today, that is our illusion.

 

—VOLTAIRE

 

 

Any new and rapidly growing trend in management methods should be considered with healthy skepticism, especially when that method is meant to help direct and protect major investments and inform key public policy. It is time to apply this skepticism to the “risk management” methods meant to assess and then mitigate major risks of all sorts. Many of these methods are fairly new and are growing in popularity. Some are well-established and highly regarded. Some take a very soft, qualitative approach and others are rigorously quantitative. But for all of these methods, we have to ask the same, basic questions:

• Do any of these risk management methods work?

• Would anyone in the organization even know if they didn’t work?

• If they didn’t work, what would be the consequences?

For most organizations, the answers to these questions are all bad news. Natural, geopolitical, and financial disasters in the first few years of the 21st century have, perhaps only temporarily, created a new awareness of risk among the public, businesses, and lawmakers. This has spurred the development of several risk management methods, in both financial and non-financial sectors. Unfortunately, when these methods are measured rigorously, they don’t appear to work. Most of ...