Decision-Making and The Three Rules of Risk Management
Filed under: Leadership, Leadership Skills, Life and Business, Making Decisions, Management Education
Your decision-making style says a lot about you as a leader. Some people make a lot of decisions with little more than a gut hunch to guide them and others spend a lot of time gathering insights and information to support their decision. Others struggle to make decisions on anything and might still be considering what to order for breakfast when it’s time for dinner. And still others avoid making decisions because taking a stand increases the odds that they will be held accountable for results.
Our decision-making style is driven in large part by our tolerance of risk, something that can change based on many personal and professional circumstances. An executive guiding a turn-around might operate with a high-degree of risk tolerance, while a project manager leading a construction project might have a much lower risk tolerance. First-time leaders might not have formed a solid decision-making style and might process risk at a slightly more conservative level than how they perceive their direct manager dealing with it.
A participant in a recent leadership workshop that I conducted offered up the Three Rules of Risk Management that she learned from her father (an engineer). I am grateful that she shared and appreciative of the wisdom her father passed along in these simple but powerful rules.
The Three Rules of Risk Management
1. Don’t risk more than you can afford to lose.
Good advice for corporate leaders, mid-level managers and everyone in their personal lives. Determining what you can “afford to lose” is of course the key issue here, and sometimes not so easy to calculate. A patient requiring a heart-transplant to live has one definition and a single parent that needs a paycheck to feed his family has another. It’s OK to agonize over this one a bit…it is the foundational data point of the Three Rules.
2. Never risk a lot for a little.
Common sense, yes, but I see this one violated everyday. People risk their credibility arguing over who’s right and who’s wrong on small issues. Boards and executive teams pursue ill-conceived acquisitions based on questionable assumptions. Marketing and development teams invest heavily in new products without a good understanding of the problem they are trying to solve for their prospective buyers. The operative issue here is defining whether the perceived end game or outcome is worth a lot (usually the assumption) or some fraction of a lot (usually reality). Align risk with the true definition of the outcome.
3. In general, take the risk if you can affect the outcome.
In my opinion, this is the most profound of the three rules, and another point worth agonizing over as you formulate your decision. Hoping that the dice roll your way is what helped build all of those grand palaces in Las Vegas. You cannot control the dice…they have a mind of their own, and in a business environment, hoping for the market to move your way is a guarantee that you will make your better-prepared competitor rich. You cannot affect the outcome of most situations at 100 percent, so once again, you are left to sort what you can control and what is beyond your control. This rule guides you to accept risk if you can control a significant portion of the outcome.
The Bottom-Line for Now:
Learning to think through your risk-environment can help you make the right calls on the tough issues. The Three Rules are not a silver-bullet, but they do offer a simple framework for mentally processing the implications of a decision.
In general, I’ve found that most people prefer working for leaders that make a lot of decisions and that make decisions quickly. Certainly, a leader that is slow to make up her mind or that will never make a decision has an adverse impact on her team and her organization. Alternatively, a leader that is too fast to decide or that decides more on a hunch than a good understanding of the facts, issues and risks, is prone to making significant mistakes as well. The trick is finding the right balance, and balance is about understanding and measuring your risks against possible returns. Use the Three Rules to find the right risk/return balance for your decisions.
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