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Appetites for Risk: Who's Hungry?
Topic: Risk
by Julia, 2020 Cohort
Risk is the likelihood of gaining or loosing something of value, impacted by the threat of an uncertainty that will affect this value.
We can understand this in a simple formula:
Risk = Threat x The likelihood of that threat occurring
Risk becomes more difficult to assess when we don’t know the likelihood of the threat occurring, or we don’t even know that a potential threat exists. How we perceive uncertainty shapes our approaches to risk. These approaches can be useful for tackling different complex problems, so it’s important to know their uses when tackling multifaceted issues which are deeply affected by uncertainty. We’ll call these approaches our levels of appetite for risk.
We can embrace, deny or seek to reduce uncertainty in order to better understand risk. These strategies are resilience, banishment and *anticipation, *respectively. The complex problem of climate change, which demands an almost immediate response, can be used as an example to illustrate how these strategies can be used.
- Anticipation: To reduce uncertainty, we can learn more about it, and use this information to shape the creation of policy and systems to withstand the challenges we predict climate change will bring.
- Resilience: By embracing the uncertainty of climate change and its effects, we could build a robust and flexible system that can withstand most of the possible known outcomes.
- Banishment: By banishing or denying climate change completely, we would continue with life as normal, and deal with the positive or negative outcomes later.
In anticipation and resilience appetites, we can see that processes and systems can be altered or improved to mitigate the threat if it does take place. Alternatively,* banishment* relies on an artificially low probability of a threat occurring. This can be a risky, yet low-cost approach if no threat eventuates.
How much risk can we take?#
Appetites for risk vary depending on how we perceive and react to uncertainty. Different actors employ different approaches to uncertainty, based on their expected or desired payoffs. Insurance companies have a high appetite for risk. They organise for individuals or businesses to pay them a fee in order to offset the likelihood of threats that may affect their desired outcomes. Legal practice has a low appetite for risk. It seeks to reduce uncertainty by creating harsher punitive outcomes for deviants in an attempt to reduce the likelihood of offending. Politicians sometimes deny risk, by using uncertainty to justify avoiding commitment to concrete goals or outcomes where success or failure is ambiguous.
Can risk be useful?#
Risk does not always have to be negative. However, as humans, we don’t love not having control over situations. We can lean in to uncertainty by taking risks in order to gain knowledge about things we knew were unknowns, or even things we didn’t know were unknowns. These situations may emerge where we cannot use past experience to inform or predict what may happen when we make a decision about a complex or ‘deep’ uncertainty.
Explore this topic further#
- Risk{.link-ext target=”_blank” } (Wikipedia)
- Chapter 26, Coping and Managing under Uncertainty PDF{.link-ext target=”_blank”}
- Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein
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Disclaimer#
This content has been contributed by a student as part of a learning activity.
If there are inaccuracies, or opportunities for significant improvement on this topic, feedback is welcome on how to improve the resource.
You can improve articles on this topic as a student in "Unravelling Complexity", or by including the amendments in an email to: Chris.Browne@anu.edu.au
Risk is the likelihood of gaining or loosing something of value, impacted by the threat of an uncertainty that will affect this value.
We can understand this in a simple formula:
Risk = Threat x The likelihood of that threat occurring
Risk becomes more difficult to assess when we don’t know the likelihood of the threat occurring, or we don’t even know that a potential threat exists. How we perceive uncertainty shapes our approaches to risk. These approaches can be useful for tackling different complex problems, so it’s important to know their uses when tackling multifaceted issues which are deeply affected by uncertainty. We’ll call these approaches our levels of appetite for risk.
We can embrace, deny or seek to reduce uncertainty in order to better understand risk. These strategies are resilience, banishment and *anticipation, *respectively. The complex problem of climate change, which demands an almost immediate response, can be used as an example to illustrate how these strategies can be used.
- Anticipation: To reduce uncertainty, we can learn more about it, and use this information to shape the creation of policy and systems to withstand the challenges we predict climate change will bring.
- Resilience: By embracing the uncertainty of climate change and its effects, we could build a robust and flexible system that can withstand most of the possible known outcomes.
- Banishment: By banishing or denying climate change completely, we would continue with life as normal, and deal with the positive or negative outcomes later.
In anticipation and resilience appetites, we can see that processes and systems can be altered or improved to mitigate the threat if it does take place. Alternatively,* banishment* relies on an artificially low probability of a threat occurring. This can be a risky, yet low-cost approach if no threat eventuates.
How much risk can we take?#
Appetites for risk vary depending on how we perceive and react to uncertainty. Different actors employ different approaches to uncertainty, based on their expected or desired payoffs. Insurance companies have a high appetite for risk. They organise for individuals or businesses to pay them a fee in order to offset the likelihood of threats that may affect their desired outcomes. Legal practice has a low appetite for risk. It seeks to reduce uncertainty by creating harsher punitive outcomes for deviants in an attempt to reduce the likelihood of offending. Politicians sometimes deny risk, by using uncertainty to justify avoiding commitment to concrete goals or outcomes where success or failure is ambiguous.
Can risk be useful?#
Risk does not always have to be negative. However, as humans, we don’t love not having control over situations. We can lean in to uncertainty by taking risks in order to gain knowledge about things we knew were unknowns, or even things we didn’t know were unknowns. These situations may emerge where we cannot use past experience to inform or predict what may happen when we make a decision about a complex or ‘deep’ uncertainty.