Assessing risk realistically

Test your decision making skills where risk is involved and see how perceptions are altered
Gregg Barrett LAST week I introduced part one of an exercise that forms part of the IACCM Managed Learning programme. The exercise covers risk, peoples perceptions of it and its impact on decision making. It is designed to reveal how people adjust their views on risk based on changes in information and circumstance. It does not provide for a right or wrong answer as it is hypothetical but serves as an interesting way to assess your decision making based on the situation and how you responded compared with others. This week we will look at Part Two of the exercise by picking up on the final Decision Point 4 and end off with what my response was just for interests sake. Before we get to the decision point, lets recap the hypothetical situation. You have a friend who is a wealthy entrepreneur. She has made a lot of money through successful new ventures and business initiatives. You know she has also made many of her family and friends wealthy when they invested in her schemes. She writes to tell you she has identified a new opportunity and is seeking investors for it. She is making this offer to only 100 people and needs each of them to invest a minimum of R200 000, raising at least R20million in total. She will be investing R5million of her own money and will only proceed and draw on your investment if she reaches the required total of R25million. She estimates that your return from the investment will be at least R1million and that this will be achieved in two years. The problem is, you do not have easy access to R200000. Your only significant asset is your house, which is worth about R350000 and you have an existing house loan of nearly R100000. So you will have to raise money by borrowing against your house as security Decision Point 4 Before we talk about your decision, there is a final piece of information that you should know. You have a wealthy mother. She has assets of at least R5million. You are her only child. She has recently been moved to a nursing home after a severe stroke. The doctors tell you there is an 85% chance she will die in the next 12 months. When you last saw her will two years ago you were the sole beneficiary of her estate. But there is a problem. Your mother has refused to speak to you for more than a year. She joined a religious cult and became a recluse. With luck, her will has not been changed. If it has, your lawyer says there is a good chance you could successfully contest it in court. Based on this new information, confirm the level of past success you require to make this investment:

a)less than 50% of past ventures have been successful b)between 50% and 65% have been successful c)between 65% and 80% have been successful d)more than 80% have been successful e)I will not invest under any circumstances or unless there is an absolute commitment to getting my money back What people answered: a)8% b)11% c)18% d)30% e)33% In this scenario, your mother is entered into the equation. This element should result in a more definite decision to invest. You now have two risky situations and either can deliver the money you need. This portfolio opportunity means the probability of obtaining the money you need is now greater as long as you make this investment. Now let us compare how respondents altered their decision making over the course of the exercise: a)33% a more risky position (higher percentage of past schemes have failed) b)13% a less risky position (lower percentage of past schemes failed) c)53% my position did not change What can we take away from such an exercise? The point is that views about risk are highly personal so if the function/department sees this as their major area of value-add, it is critical to build a framework and process, otherwise their clients receive an unpredictable and inconsistent service. It means the reply they get depends on who they go to and that really frustrates them and damages the image of the department. Discuss this with your colleagues and focus on the following: -Do you think other groups in your business tend to see risks differently. For example, how do sales people see risk compared with the typical view of a project manager or an attorney? What about executive management? How would they have answered an exercise like this? It is not a matter of right or wrong. It is a matter of personal preference and comfort levels. But those personal levels can create negative images and a bad reputation if they are mismatched. -Do your internal business groups avoid you or perhaps try to reach specific individuals? This is a clear sign of mismatched approaches to risk. -Do you have a defined method or criteria on which risks and their acceptance are assessed?

In particular, what methods do you use to evaluate probability (we are all good at understanding consequence and it is fear of consequence that often creates irrational decisions). If you enjoyed this activity and found it valuable, you could register for the IACCM Learning Modules, complete with exercises, case studies and tests. Visit www.iaccm.com/learning to see the full set of more than 70 modules that are on offer. Lastly, for those who are curious, I was one of the 53% whose position throughout the exercise did not change.

making money . . . Dont put your change in a tin, make money through new ventures and business initiatives