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

CHAPTER 10

The Language of Uncertain Systems: The First Step Toward Improved Risk Management

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

 

—PIERRE SIMON DE LAPLACE, 1812

 

 

Part Two of this book, the “Why It’s Broken” part of the failure of risk management, at this point might seem overwhelming. We discussed several issues with current approaches:

• How different areas of risk management evolved very different solutions and none were complete solutions (but some were much further from the mark than others).

• Differences in the definition of risk, leading to confusion in the industry

• Systematic problems with how experts assess uncertainties and risks

• Popular but worse-than-useless solutions to risk analysis and risk management

• Conceptual obstacles to adopting better methods

• Common errors even the quantitative analysts make, including lack of consideration for common errors in subjective estimates, lack of empirical testing of models, focusing on all the wrong measurements, ignoring correlations or modeling them in an oversimplified way, and excluding the biggest risks

Most of the key problems with risk management are focused primarily on the problems with risk analysis. That is, if we only knew how to analyze risks better we would be better at managing them. For the broader risk management component, I’ll offer suggestions that will help support the organization, implementation, and desired scope of risk analysis.

Fortunately, ...