How to weigh up risks when making decisions

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See exactly how think about risks when you make big or small decisions. You can weigh up how likely (and catastrophic) all the possible risks are to make the best decision!

We all make dozens, if not hundreds, of decisions every day. Many of them are made at a subconscious level. From small decisions like what to have for dinner, to potentially life-altering decisions, knowing how to assess risk versus reward in decision making is a critical life (and work) skill.

Humans are notoriously bad at accurately assessing risk. For example, just think about how many people are afraid of flying – even though a commercial flight is statistically much safer than getting in your car. In other words, our automatic perceptions of how risky a particular action is are unlikely to be very reliable.

A risk management process is broadly broken down into four questions:

  • What could possibly go wrong?
  • How catastrophic would that eventuality be?
  • How likely is it to happen?
  • What can be done to mitigate it?

Let’s look at some practical tips for weighing up risk when you’re making big decisions in work and everyday life.

Think about what could go wrong

Write down every single thing, no matter how big or small, that could go wrong as a result of this decision. Risks could potentially include financial risk (loss of money or property,) reputational risk (negative publicity for you or your company,) legal risk (breaking the law or being prosecuted,) and personal risk (illness or injury.) Not all categories will be relevant to all decisions.

Rate how likely each thing is to happen

Use a 1-5 scale, where 1 means something is tremendously unlikely to happen and 5 means it is a near certainty. Most risks will be somewhere in the middle.

Rate how catastrophic each outcome would be

How bad would it be if this possible risk did happen? Again, categorise everything on a scale from 1 to 5. A 1 is something that is mildly annoying or inconvenient, while a 5 is something that would be truly disastrous (a 5 rating should be reserved for outcomes like “death” or “the company goes bust.”) Try to be realistic. Your boss being annoyed might feel like a 5 on the catastrophe scale, but it really isn’t.

Multiply your ‘likely’ and ‘catastrophe’ scores together

Multiply your likelihood score and your catastrophe score for each risk factor. You’ll get a number between 1 and 25. That is the overall risk rating for that hypothetical scenario.

Here’s an example: you’re organising an event with catering, and you have identified “kitchen accidents” as a potential risk factor. You determine that the likelihood is a 2 – your staff are well-trained and have adequate equipment and protective gear to keep them safe, so the chances of an accident are fairly low. But the catastrophe rating is a 4 (the worst-case scenario is a serious injury that puts someone in the hospital.) This gives you an overall risk rating of 8.

These numbers allow you to categorise your risks. I like using the traffic light system: Red is for anything with a score of 18+, Amber is for 10-18, and Green is 1-9. Using these scores, you can see where you should focus your risk mitigation efforts.

How can you further reduce risk?

For anything that isn’t in the Green category, check if there are additional safeguards you can put in place to minimise the likelihood of something happening, the severity if it does happen, or both. Possible ways to mitigate risks might include further training, rules around what is or isn’t permitted in a particular space, additional protective equipment, or a more robust cost-benefit analysis before spending money.

Once you’ve put all the appropriate controls in place, run your 1-5 numbers again and give each risk factor a revised rating.

Risk mitigation is everyone’s job

It’s often a good idea to put a single person in charge of mitigating a particular risk. This might be the health and safety specialist who orders the right protective equipment, the manager who makes sure all employees have had the right training, or the finance manager who crunches the numbers in the budget. But ultimately, managing risk and reducing it where possible is everyone’s job.

Share your completed risk assessment with everyone who is involved in your project, and make sure it’s clear what everyone’s responsibilities are. Everyone should understand the rules and best practice, and should feel empowered to speak up if they see unnecessary risks being taken.

Deciding the risk is too high

You might occasionally find yourself in a situation where you’ve done everything you can to reduce a risk, but the chances of something going wrong or the outcome if it does are still unacceptably high. In these situations, you might need to decide to stop, pause, or radically rethink a whole project. While this might feel frustrating, it’s part of the process of risk management. Knowing when you really shouldn’t take a risk is as important a skill as keeping risks in proportion.

Accept that there are some risks you can’t control for

There are always risks and threats that we did not see coming and cannot easily control for. For an example, just look at the COVID-19 crisis. When business owners and events managers were putting together risk assessments at the beginning of this year, they probably didn’t have “global pandemic” on their list of potential risk factors.

Accepting that some situations are truly out of your hands, and that you’ll have to deal with these in the unlikely event that they arise, will go a long way towards calming your stress levels.

Some people are naturally more averse to risk, while others tend to be risk-takers. There’s space for both, and being either too cautious or too cavalier can both cause problems. That’s why following a defined process like this one for calculating and managing risk is so important.

Things will inevitably sometimes go wrong. That’s part of both life and work. But by being prepared, you can anticipate the risks and take steps to minimise them.

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