The Paradox of Risk
By Steve McKee
The Philippine Department of Transportation got into a bit of a fix recently for publicly thanking the coronavirus. In an attempt to “provide an enlightening and awakening narrative” that might cause people to see a silver lining in the viral cloud over their heads, the DOT instead found itself facing an online mob and had to issue a public apology.
I’m not about to thank the coronavirus, but I will say it has offered a valuable and nearly unprecedented learning opportunity. Just as the historical anomalies of Europe’s Iron Curtain and Korea’s DMZ created an unintentional economics experiment — revealing that people with the same culture, history and natural resources thrive under one type of system (capitalism) and writhe under another (communism) — a global pandemic sets the stage for a rare, universal object lesson: Risk cuts both ways. Unavoidably and indisputably.
There have always been widespread risks related to economic cycles — recessions affect us all — but acute risk is rarely universal; in business, it’s usually limited to individual companies or categories. The impacts of the virus and its associated quarantines vary among industries, but no company (or individual) is merely a spectator on this one. Avoiding the risks of further spread exacerbate the risks of economic calamity, and vice versa. For us all.
Normally those of us whose job it is to make tough calls tend to think of risk management in somewhat one-dimensional terms: Should we go forward with a particular idea or strategy, or not? If we judge something is worth the risk the answer is yes; if not, the answer is no.
But as some of us may have learned the hard way, the “no” carries risk as well (see “What’s the ROI? Wrong Question.”). It’s possible to get so preoccupied with mitigating a risk that we neglect the risk of mitigation itself.
It’s also common, especially in a crisis. Years of research my firm has done revealed four dangerous internal dynamics that often infect companies facing sudden predicaments:
- Leadership misalignment
- Disorientating fear
- A loss of focus
- Decision-making inconsistency
We can see all four affecting the current public debate.
Much more consideration has been given to how broad, wide and lengthy virus containment should be than to the risks of containment itself — at least from a modeling standpoint. Projections of virus-related hospitalizations and death rates are increasingly sophisticated, continually updated and ever in the news. But we have yet to see formal modeling of the health effects of halting the economy. From increases in the suicide rate to missed cancer screenings to the downstream effects of drug and alcohol abuse, economic devastation is deadly, too. What we’re witnessing is a case in point of the paradox of risk.
Oddly enough, a metaphor I often use to explain the destructive internal dynamics in business is the human immune system; at any given time, there are bacteria (or viruses) out there trying to take us down, but with healthy immune systems we can defeat them. It’s when our immunity gets depressed that we succumb.
What’s true in epidemiology is true in economics. Just when we need the most reasoned and well-balanced risk evaluation, we tend towards being unreasonable and unbalanced. Rarely is it a matter of life and death in business (except, in rare cases, to the business), but the paradox of risk is no less real. Level heads and clear focus are required to overcome it.
It may seem obvious at first what needs to be done (stop the spread of the virus!) but that’s not always the case, not often practical and sometimes impossible. It could instead be a variation (slow the spread), a clarification (prevent the hospital system from becoming overwhelmed), an elevation (ensure the fewest overall deaths from all causes) or something else entirely.
Each of these objectives calls for differing metrics and different strategies, all carrying with them a variety of risk factors. Without a clear objective, effective risk evaluation is impossible. And that makes effective risk mitigation improbable.
Few of us have any real say in public policy decisions with respect to COVID-19. However the circumstances resulting from them affect our companies, we would do well to remember the paradox of risk and its many manifestations: There’s a risk of doing something and a risk of doing nothing. Every decision has consequences and unintended consequences. Making no decision is a decision. You can’t eliminate tradeoffs, only make them.
We’re all sharing this moment of communal risk. If we can all realize something useful from it, perhaps that is something to be thankful for.
Co-founder and author, Steve specializes in addressing the most meaningful problems. Call Steve when you want to change the world. He’ll have a thought (and some research) on that.
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