Facing “a new era of catastrophes,” book by Wharton profs offers tips for business leaders
Here’s a glimpse into the Top 5 guidelines, out of 10:
1. Catastrophes are on the rise, and your firm may be next in line to suffer one. Don’t pretend it can’t happen to you, and instead imagine five potential disruptions that could hit this year or next if one of your current assumptions turns out to be wrong.
2. Involve personnel at all levels in designing risk-management and crisis-response strategies. Involve company directors, top executives, managers, and front-line employees in taking steps now to prepare for the unexpected. Tapping outside expertise can help you put the different parts of the puzzle together and save you time.
3. Recognize behavioral biases and simplified rules that misdirect company decisions. Engage in deliberative thinking and systematic analysis by recognizing that intuitive ideas can lead business leaders to misestimate their low-probability risks and then mismanage recovery efforts when they materialize.
4. Identify and appraise the risks you face. Prioritize the enterprise risks that demand attention now by building on what directors, executives, and managers separately see, and recognize the hazards that can threaten the firm as a whole.
5. Define your firm’s risk appetite and risk tolerance. Identify and balance risk appetite and tolerance in mapping your company’s overall strategy.
“The ‘unthinkable’ has gone from not being on anyone’s radar screen to now being central,” says Useem, director of Wharton’s Center for Leadership and Change Management. “But to think about it, you need tools, and wisdom.”
Kunreuther, who co-directs the Wharton Risk Management and Decision Processes Center, says a major challenge firms face is the tendency to be myopic.
“Managers in firms think about the next year instead of the long term,” Kunreuther explains. “As a result, disasters are viewed as low probability events. They think, ‘It’s not going to happen to me.’”
This sometimes causes a decision maker to be shortsighted when faced with the expense of investing in protection against a high-consequence event—the near-term payoffs don’t appear to justify the up-front costs.
“But if they stretch the time horizon to 10 or 20 years, then the likelihood of at least one catastrophe occurring during this period is high enough for them to pay attention to the consequences and justify the investment,” Kunreuther says.
But, says Useem, cautioning that he doesn’t want to seem “too somber,” but the world is “becoming a riskier place to inhabit. Recognizing risk and its impact, and thinking through preparations for it and responses to it, is for everybody.”
The growing concern of risk, explain Kunreuther and Useem, is evident in influential business gatherings. They note, particularly, the World Economic Forum, on which they’ve collaborated together for years.
“In the 1990s, the Forum devoted only a few sessions in its annual meeting in Davos, Switzerland, to risk issues,” they write. “Of its nearly 250 sessions at the at the 1997 annual gathering, for instance, just a dozen were explicitly focused on the topic. By the mid-2000s, however, a third of its sessions touched on risk, and by the 2010s nearly half.”
In an earlier volume, Learning from Catastrophes: Strategies for Reaction and Response, published in 2010, Kunreuther and Useem featured the contributions of leading experts in risk assessment, risk perception, risk management, and disaster recovery, identifying the behavioral biases that misinform leaders about the likelihood and consequences of catastrophes.
With their new “Mastering Catastrophic Risk,” they take their mission up a notch.
“Companies must get their act together, and get it together now,” says Useem.
Lauren Hertzler is staff writer at Penn Today. The story is published courtesy of Penn Today.
