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

CHAPTER 7

Worse Than Useless: The Most Popular Risk Assessment Method and Why It Doesn’t Work

Many are stubborn in pursuit of the path they have chosen, few in pursuit of the goal.

 

—FREDERICK NIETZSCHE

 

First, do no harm.

 

—AUGUSTE FRANÇOIS CHOMEL

 

 

Contrary to popular belief, the phrase, “First, do no harm,” is not actually part of the Hippocratic Oath taken by physicians, although it is still a basic principle of medicine. The developers of the most popular risk management and decision analysis methods should also make this their most important principle. But because their efforts to develop these methods are often undertaken by practitioners isolated from the decades of academic research in decision-making and risk, this principle is routinely violated.

As I mentioned earlier, risk management is not just about reacting to the most recent disaster (which was, at the time I was writing this book, the 2008/9 financial crisis). If it were, the failures on which I would focus this entire book would be only the errors in the use of complex mathematical models in finance. We will discuss those, too, but not to the exclusion of some significant risks being assessed with some very different methods. Let’s stay focused on the idea that risk management is supposed to be about all those disasters that haven’t happened yet.

If you are one of the first three of the “Four Horsemen” of Risk Management discussed in Chapter 4, then you might not be at all familiar with some of the most popular ...