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

CHAPTER 6

The Limits of Expert Knowledge: Why We Don’t Know What We Think We Know about Uncertainty

Experience is inevitable. Learning is not.

 

—PAUL J.H. SCHOEMAKER

 

We are riding the early waves of a 25-year run of a greatly expanding economy that will do much to solve seemingly intractable problems like poverty and to ease tensions throughout the world.

 

—WIRED (JULY 1997)

 

 

Naturally, we value expertise whether it’s in a business colleague, a politician, or an electrician. And the vast majority of attempts to assess risks will at some point rely on the subjective input of some kind of expert. The only possible exceptions to this are situations where great volumes of historical data are available, such as in the analysis of stocks or most forms of consumer insurance (we’ll talk about those later). But for almost all operational and strategic risk assessments in business, someone who is deemed an expert in that issue is asked to assess a probability either directly or indirectly.

They may assess a probability quantitatively (e.g., “There is a 10% chance this project will fail”) or they may be asked to provide this estimate in some verbal form (e.g., “It is unlikely this project will fail”). They are sometimes even asked to express this likelihood on some sort of scale other than explicit probabilities (e.g., “On a scale of 1 to 5, the likelihood of this project failing is a 2”). Even in some of the most quantitative analysis of risks, human beings must use their judgment to ...