The Failure of Risk Management, 2nd Edition

CHAPTER 11Starting with What Works

The most important questions of life are, for the most part, really only problems of probability.

—PIERRE SIMON DE LAPLACE (1812)

In part 2 of this book, we discuss the “why it's broken” part of the failure of risk management. So far, we have focused mostly on the problems with risk analysis, but, as stated previously, this is not simply conflating risk analysis with risk management. It should be clear that risk management must be informed by some type of assessment of risk. This is true regardless of whether some managers (and well-known authors) believe they are analyzing risks or managing risks at all.

We can't fix risk management if we don't fix risk analysis. We've discussed several problems with risk analysis and a little historical context for how the problems evolved. This included the following observations:

• Different areas of risk management evolved very different solutions and most were narrowly focused (but some were much further from the mark than others).
• Differences in the definition of risk and related concepts lead to confusion in the industry.
• There are systematic problems with how experts assess uncertainties and risks.
• Many popular solutions to risk analysis and risk management are actually worse than useless.
• There are common conceptual obstacles to adopting better methods.
• Even quantitative analysts are not immune to avoidable errors and, similar to the qualitative methods, do not usually measure their own performance. ...