Shall we stop taking silly risks, and go back to being sensible and boring again?
If you’re at all interested in the history of the last hundred years, you’ll be familiar with the cases where governments have done bizarre and stupid things in a crisis, usually resulting in their own downfall. From the disastrous German offensive of 1918, to the mad idea of the Georgian government to start a war with Russia last year, via—oh, I don’t know—the calamitous Argentine invasion of the Falkands/Malvinas 25 years ago, modern history is full of madcap endeavors which always seem destined to fail. What on earth, ask historians despairingly, can they possibly have thought they were doing?
The classic case is probably the Japanese attack on Pearl Harbor in 1941, where historians still cudgel their brains trying to understand why the Japanese could possibly have thought they could get away with attacking a country which was the largest industrial power on earth, with twice their population.
Handling risk—usually very badly
Those of you not especially interested in military history will be relieved to hear this article is about human psychology; in particular, the inability of humans to understand and process risk.
In all of the cases cited, leaders took insane risks in the hope of achieving a smashing, overwhelming success: the end of World War I on German terms, the restoration of national territory seized by the British, and so on. For the Japanese, with a week’s supply of petrol left in the country, the choice was a humiliating withdrawal from China (think an oil embargo to force the US to withdraw from Afghanistan) or a very risky attack which promised, if successful, control of as much oil as they could want and strategic mastery of large parts of Asia.
Roll the dice . . .
You can see where this is going. Human beings are basically lousy at understanding and managing risk. That’s why it can be argued that every sensible organization should try to remove risk from its day-to-day operations as far as it can—because people can’t handle it properly.
Why people make such a mess of risk
Studies have shown that we assess risk based mainly on what we hope to gain, not what we fear to lose. People go to casinos because of the small chance of becoming a millionaire, not because of the very large chance of losing all their money.
It’s no different with the fate of nations. War games in 1918 and 1941 showed that there was a large probability of failure. They also showed there was a very small chance of a smashing success. As for modern financial risk-management techniques, we had better pass over those in silence, out of respect for the dead.
Part of the problem is cultural. This year in Britain, people are celebrating (or in some cases not celebrating) the thirtieth anniversary of Margaret Thatcher becoming prime minister. Thatcher helped publicize the idea that uncontrolled risk-taking was brave and worthy; when in most cases, in fact, it’s either stupid or naïve. Businessmen who took insane risks were given the kind of honors previously reserved for polar explorers and war heroes.
More recently, the willingness to take risks with other peoples’ money was seen as worthy of high salaries and fat bonuses. (I sometimes think that “risk-taking entrepreneur” is a fancy way of saying “greedy idiot”, but I may be overly cynical.) There’s always risk in life, and many successful enterprises involve a degree of uncertainty , but sensible human beings, and sensible organizations, manage to keep it to a minimum.
A new attitude to risk
In practice, the most successful organizations, companies and economies don’t take unnecessary risks. They innovate cautiously, learning from their mistakes and seeking to do better each time. When Toyota developed the Lexus brand, they didn’t risk untold trillions of Yen on someone’s bright idea. They sent a team to California for six months to live among their target market and find out what people wanted and liked. Then they designed and built a car on that basis.
We need to re-think the culture of risk-taking. In today’s bureaucratized and corporate world, individuals rarely suffer any major damage if the risks they take lead to disaster. Heads they win, tails we lose. Risk is part of human life and is an element of taking decisions in any organization. But it needs to be got back into proportion, and minimized as far as we can. We should stop praising and rewarding people who lose all our money at the roulette table.
Technorati Tags: risk, uncertainty, decision making, leadership


One of the things I find tough is coping with people who suffer with ‘delusional optimism’. It’s not that I object to people looking on the bright side. It’s the extent to which I see people hurting themselves and their prospects by doing so as a matter of principle that bothers me.
We’ve all heard about so-called stress tests to check up on the potential for banks to fail. By checking their finances and the strength of their balance sheets in advance, the government hopes to give them time to correct any problems and get ready for whatever lies ahead—this time without relying on government bail-outs and rescue plans.
How can you move on when it seems nothing and no one will give you a break? As unemployment grows and new jobs attract thousands of applicants, is there any way to keep yourself feeling tough enough to bounce back?
Can you imagine someone waking up one morning and saying to themselves, “My life is far too simple. It’s high time I complicated it more”?
As we try to pull ourselves out of our current problems, it’s clear that we are all going to have to make some significant changes. The chances are that you will fail in at least some ways in your first attempts.
When we were kids, it was the best thing in the world to have friends knock on your door and ask you to come out and play.
Can you find some compelling points about you that differentiate you from everyone else? If you take a little time, I’m sure you can. Each person is unique. Everyone has some strengths, even if they aren’t the ones they would like to have. This exercise is vital to show you how to move forward, away from today’s problems, with a reasonable assurance that you can be successful.
Has our economic crisis been partly the result of too much leadership testosterone, both on the trading floors and in the boardrooms of banks and investment firms? Would a more balanced male-female presence have made a difference in averting the current crisis? It’s worth considering.
“I can’t get the attention of our top leadership,” a senior level manager in a major global bank complained hotly last week. “No one can. All they do is hunker down together in one of the conference rooms and talk strategy.”


