E242 | Dealing with Risk In A World of Uncertainty with Michele Wucker
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CastBoxDoes everyone in your team look at risk in the same way? When we make decisions about whether to take a risk or not, we all have our biases. Our guest on The Melting Pot this week argues that diverse groups tend to make better decisions as they bring different perspectives. That’s why it’s beneficial to look at the risk profile of everyone in the room to ensure that your team looks at risks the right way and understands everyone’s perception of risk.
This week we learned from strategic advisor and best-selling author, Michele Wucker. Michele is famous for having coined the term ‘Gray Rhino’ – a metaphor that made headlines worldwide as a framework for the ignored warnings for the COVID-19 pandemic and has appeared in media in more than 70 countries and 35 languages and counting. It has sent tremors through global stock markets when Chinese officials warned of gray rhino financial risks. Central banks and securities regulators around the world use gray rhino theory, as do business strategists, boards of directors, business continuity and emergency management professionals, insurers, ESG specialists, and policymakers focused on everything from national security to climate change.
In this episode, Michele talks about her latest book, You Are What You Risk: The New Art and Science of Navigating an Uncertain World, about the perception of risk and how people feel about it. How can you ensure that your team looks at risks the right way? Michele explains that it’s important to understand what those risks are, and what the different risk perceptions are within the team. That is what will help you to assess how to move your business forwards, so you don’t make the wrong decision. At the end of the episode, Michele shares her perspective on the recent collapse of several banks and how people chose to ignore the signs that led to it.
A great conversation. Make sure to download and listen to learn more from Michele.
On today’s podcast:
- What is risk?
- How different people perceive risk differently
- The ‘risk fingerprint’ metaphor
- Balancing the different risk profiles in a team
- Dealing with risks as an organisation
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Dealing with Risk In A World of Uncertainty
Michele Wucker is a strategic advisor and best-selling author who coined the term “gray rhino” as a call to take a fresh look at obvious, probable, impactful risks that give us a choice to act or not. Her insights help to explain why some people step up to head off the dangers right in front of their eyes, yet others let themselves and those around them get trampled.
Michele introduced the gray rhino at the Annual Meeting of the World Economic Forum in Davos in 2013. It inspired her third book, the influential global best-seller, THE GRAY RHINO: How to Recognize and Act on Obvious Dangers We Ignore, in 2016. Drawing on her earlier work as a global economic policy analyst, financial journalist, and think tank executive, she is founder and CEO of the Chicago-based advisory firm Gray Rhino & Company to help business and policy decision makers to use gray rhino theory to improve their risk responses.
To her great surprise, Michele’s readers encouraged her to apply the concept to more personal issues. Her 2019 TED Talk about using the gray rhino in personal life has attracted more than 2.5 million views. Her newest book, YOU ARE WHAT YOU RISK: The New Art and Science of Navigating an Uncertain World, builds on insights into personality and societal influences on how and why different people respond to looming risks the way we do.
What exactly is ‘risk’?
Michele defends that we need a way to talk about risk that works both for risk professionals and for people who stay up at night thinking about these things. In general, for people who are affected by risk but don’t necessarily have a good vocabulary around it. Often, people who are scared think of risk in a quantitative way but don’t think about the behavioural side of it.
Many professionals have shared with Michele their need for a better way to talk with others in their company. They needed a bridge. And that’s what Michele is trying to do. Much of her work is about talking to the experts, reading them, deep diving into the ‘geeky stuff’ and then pulling out what the rest of us care about.
But, first of all, what do we talk about when we talk about risk?
In her workshops and webinars, Michele asks the same question. She usually gets three sets of answers that differ depending on the age, the industry, the interests of the group and their inherent risk biases. The first answers revolve around peril, loss and danger; the second concerns opportunity, risk appetite, or ‘taking enough risk’. Then, there’s the ‘well, it depends’ sets of answers.
“I think it’s important for everybody to realise what sort of a bias you bring to conversations about risk and how you can offset that. For me, risk is about choice. Every choice you make is a risk. Every risk you take is a choice.”
Each of us makes around 35,000 choices a day. That is a lot of choices and a lot of risks. With the definition of risk, Michele tries to reconcile the old-fashioned classical economic definition of it, which is something that you can assign a probability to.
“But a lot of the “probabilities” that we see have very little to do with reality, as we saw with the subprime loans being investment grade rated in the great financial crisis, as we saw with the people who gave Silicon Valley Bank and other banks a clean health rating very shortly before it was clear that they weren’t in clean health. So there’s an idea of risk as something where you can assign a probability, and there’s uncertainty being something different that you can’t assign a probability to. But in real life, risk and uncertainty go together.”
Michele adds that when people talk about not liking risk, uncertainty is what they probably do not like. So she wants to challenge the notion that risk is something you can assign a probability or a valuation to, although the entire insurance and risk trading and derivative system depends on that. Instead, she encourages people to be more sceptical of it and to be aware that uncertainty is a huge part of being comfortable with going through a world that you don’t know enough about, that you don’t have as much control over as you might think or want to have.
How different perceptions of risk work
Michele thinks of risk as walking into a room full of fun house mirrors where the nature of the risk changes when you change your perspective. For example, she adds, her walking down a dark alley at three in the morning doesn’t entail the same risk as if a male football linebacker does it. The same happens in business, she says.
“It’s not the same risk for a woman in a non-gender typical position to make a mistake as it is for a man. There’s research that shows this. It also depends on how much knowledge you have that both decreases the risk and your amount of discomfort with it, because there is a greater chance that you’re going to be able to manage it. There are risks that you have control over or that you don’t, and that changes how you perceive them.”
There are academic studies where subjects are presented with two different options. One is ‘riskier than the other’. In some cases, two people choose the exact same risk, but their risk tolerance is very different. Whereas for one of them, it might seem like a challenge, for the other, it’s not a big deal. Michele says we take for granted that we make decisions emotionally or rationally. But people don’t understand enough about everything that influences why we take (or not) the risks we do.
“And it has to do with a lot of factors, some of which we can control and some of which we can’t, but which we can optimise with the things that we can control. And it’s amazing to me that people make so many decisions not really understanding what is driving them that might lead to choices very different from what they think they want.”
For instance, at the moment, there’s a debate about whether airlines should ban small children from flying for free on their parents’ lap, as some children have been hurt during turbulences because they’re not in a safety seat. So, should they require parents to buy a seat so they can put the safety seat in? Even though that might mean that a lot of parents can’t afford to drive, and that will result in more fatalities if they’re not taking the plane? It’s a tough decision, says Michele, but some people will look at the numbers (e.g. experts, policymakers, airline executives) saying that they’ve calculated the risk and it’s safe. And they say that very authoritatively, but that’s often not what their customers perceive.
That gap between the perception of people making the decisions and the people who bear the consequences is a really tough thing for every aspect of business, including marketing, adds Michele. Are you marketing something to people who don’t believe what you’re saying?
“There is also evidence that people believe that products from other countries are “not as safe as theirs”. The standards are very different. Some people think that their standards are better and other countries are worse. So if you’re selling things across borders you’ve got to think about very different safety standards because you’ve already got a handicap in how people perceive your products.”
The ‘risk fingerprint’ metaphor
Every business tries to prevent bad decisions that could hurt its customer base or that would send it to bankruptcy. So, how do we mitigate people’s different perceptions of risk? For Michele, it starts with awareness so that if you know there’s a particular bias, you can correct it. And this awareness starts with something she calls the ‘risk fingerprint’ metaphor.
“Think of it was when you put your finger on the biometric machine with the little green light at the airport, it leaves a print. When you go to a crime scene, whether it’s the victim or the criminal, leave a print on the wine glass. And that’s what a lot of financial analysts might call a risk profile. Those are the risks that you take. And if you look at the risks that someone has taken, that can tell you an awful lot about that person, much as that biometric indicator does.”
So, if your choices are your risk profile, your risk fingerprint is what leaves that impression. And just like a real fingerprint, there are three elements. The first is the immutable genetic part. It’s why the fingerprint is such a tremendous biometric, and that’s your innate personality. It’s whether you’re calm or anxious, methodical or impulsive when you deal with risks. They’re just like personality traits.
“The second part is, think if you cut your finger with a knife and that’s going to leave a scar, an indelible mark on the biometric indicator. Similarly, with human beings, if you take a risk or if something happens to you, that lived experience is going to leave an indelible mark on how you deal with future risks and that interacts with your innate personality types.”
The third part is where Michele spends a lot of time with clients. And that’s what can you do to create the right environment – whether social or physical–, processes or habits that help you make better decisions and to optimise those processes and environment for the innate traits and the lived experiences that you’ve had? That is, the people surround you, a personal board of directors or your risk committee.
Physically, adds Michele, many factors influence our risk-taking. The temperature in the room – the colder it is, the more risk tolerant you are–, if you eat spicy food, you become more risk-seeking. The colour around you, the smells, whether you’re smoking or not. Some recent research says that taking Tylenol might make you more risk-seeking even the day of the week.
“Then, the processes, and that’s really important for leaders, whether you’re on a team or a CEO or a board of directors. And that is, how do we make decisions? How do we create the right level of structured debate to make sure we’re looking at the options, to make sure that our biases aren’t pulling us in a direction that’s not the right one? So all three of those together make up your risk fingerprint. The innate personality, the lived experience, and then the environment that you create and reinforce through business processes.”
How to balance the risk profile on a team
All the research over the past decades shows that diverse groups tend to make better decisions and are more likely to consider alternatives and think things through.
“Certainly, you want industry diversity, you want diversity of perspectives so that some of the people on your board are in touch with what your customer base thinks, or your investors or your employees. We don’t think often enough about risk diversity. There are some stereotypes about gender or ethnicity and risk choices which are way off the mark and which most of us don’t even realise that we have.”
But there are industry differences, and even within industries, adds Michele. A trial lawyer will have a different fingerprint and risk profile from a contracts lawyer. But research shows that certain personality types tend to cluster in specific careers (e.g air traffic controllers, creative people). So, if you have different industries, you’ll probably get some risk diversity. It’s important to understand where people are coming from, whether they look at processes or they move fast and don’t mind breaking things. Michele encourages people to look at something called the Risk Type Compass from a group called Psychological Consultancy in the UK.
“It’s a great tool where they ask you a lot of questions about choices that you would make. As a result, you’ll learn what your risk type is. Whether you are more methodical or impulsive, more calm or anxious, and the different profiles in different parts of your life.”
There might be someone who’s very risk-seeking in their financial decisions, but not regarding health and safety. So when you look at a group or team, it helps to look and see what the profile of everyone in the room is, says Michele.
“Geoff Trickey, who created this, told me that it’s amazing when he’s done this with boards, he’s often found that people with similar risk types often sit next to each other in the boardroom. And once you know that, you’ll know if you have a bias towards one sort of decision or not, and whether you need to bring in outside experts or whether you need to change your process a little bit, just to make sure that you’re not biased in one direction or the other, or that the bias is appropriate or not for your particular company and strategy.”
The Gray Rhino theory
Michele often asks people, ‘is this decision riskier than X?’ They’ll look at something as risky, and she’ll reply, ‘compared to what?’ Because you’re making a choice. She admits being surprised about the scope of the application for this. And she came up with Gray Rhino theory, which is the big scary thing coming at you. It’s obvious, and it’s probable, and you are much more likely to let yourself get trampled by it than you think.
It’s a challenge to take a fresh look at the obvious problems, those on the board agenda, the ones you all know about to keep you from just shutting them out because that’s how our brain works.
“It’s like living next to a train. You don’t hear it anymore. And that’s why some of the most obvious problems and challenges are the ones that don’t get the attention that they deserve. But it’s not inevitable that you ignore it. And so that’s a really important point. It’s that the thing is coming at you, and you’ve got a choice over what to do about it. And don’t just take for granted that you’re dealing with it just because it’s obvious.”
When she went around the world, people started asking her how they could apply the gray rhino theory to their personal life. There’s a huge difference between sovereign debt analysis and sovereign credit risk and personal life in size of risks.
“And so I’ve got a sort of a schematic for how you prioritise things. And some of that actually has to do with these internal personality traits, like how you perceive a certain risk. In the pandemic, you see all these stories about people making riskier decisions. They’re quitting their jobs, they’re starting businesses. And my point is that they’re not necessarily making riskier decisions, that they’ve reprioritised what they’re willing to risk or not.”
And when you’re talking about business risks, there’s a whole set of things to look at, she adds. How big is it? How close is it? How fast-moving is it? Then, there are the meta risks, which are the structural risks. There are flaws in your corporate culture or decision-making process that you’ve got to address before you can actually fix the individual parts of things. So part of that analysis is thinking, if you fix this problem, will it solve other problems, or will it stay broken until something further up in the chain gets fixed? And how related is it to other risks? This leads to finding strange bedfellows or not-so-strange bedfellows who can help you solve the problem and reduce the risk.
“Something people don’t pay enough attention to is that humans are often more afraid of taking a risk to reduce a risk than of sitting still. They’d rather be wrong in a group than right alone. And that goes to social risk.”
Dealing with risk as an organisation
When we think about decisions or knowledge not going up through a company that pertains to life-threatening risk, the example of NASA and its two space shuttle disasters comes to mind. In both cases, people further down the organisation had articulated the risk to their manager, but the manager didn’t want to push it up. So, how do you get the whole organisation to feel safe to share bad news?
Over the last two decades, many companies have started to include Chief Risk Officers, starting with financial institutions.
“Having somebody who thinks about those things, who helps to pull together all the strands of risk, whether it’s operational, financial or strategic, having someone who’s on top of that is really important. And the other part is to be able to communicate the opportunity that goes along with a risk.”
Michele often asks people to think about the big gray rhino coming at them. What are they going to do about it? You just stand there and get trampled, which unfortunately happens too often.
“Are you just going to kind of step out of the way, and let somebody else get trampled? Or are you going to harness the strength of this thing? Every single VC wants to know at the top of your pitch deck, what’s the problem you’re trying to solve? And so a problem is an opportunity to solve it. So I think some of it involves really reframing the way that the company thinks of risk.”
So, how do you encourage people to be comfortable with failure? A lot of that, adds Michele, goes to meeting design. Do you have a ‘devil’s advocate’? Another term she learned recently is ‘angels advocate’. If your group always says, we can’t do that because XYZ, have someone assigned the role of saying yes no matter what, particularly someone who’s used to saying negative things and the opposite? The devil’s advocate should be someone who’s used to being the yes person.
“Get people comfortable in playing different kinds of roles so they can see other perspectives and make sure that, in group settings, the people who are being quiet have some input because they’re usually the ones who are listening and thinking the most, and make sure you’ve got the different points of view represented.”