The Failure of Risk Management, 2nd Edition

CHAPTER 2A Summary of the Current State of Risk Management

People who don't take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.

—PETER DRUCKER

Before we start changing any system, it's a good idea to get a reading on its current state and to figure out how it got that way. Risk management is a very old idea that has changed dramatically just in the past few decades.

The history of any idea brings its own baggage that often limits our current thinking on the concept and risk management is no exception. Institutions evolve, standards are codified, and professions mature in such a way that it causes all of us to think in more limited ways than we need to. So before we consider the current state, let's see how we got here.

A SHORT AND ENTIRELY-TOO-SUPERFICIAL HISTORY OF RISK

Organizational risk management could be said to have existed at least as early as the first time a king or chieftain decided to fortify walls, make security alliances, or store extra provisions in case of famine. Even more formalized risk management by agreement among parties seems to be a feature of the earliest civilizations. Since ancient Babylon, traders managed the risks of transporting goods great distances by having the buyers provide loans to the sellers that would be repaid with interest only when the goods arrived safely. The Code of Hammurabi by the Babylonian king of that name provided certain compensations or indemnifications ...