Yesterday I blogged about the concept of downside risk as a decision-making tool. Downside risk focuses on a worst case scenario as part of making a go/no-go decision. But it shouldn't be used exclusively or in isolation. Whenever we face a future event, we also have to consider the idea of probability. How likely is it that you'll trash a $50,000 piece of equipment? 1 in 10 million? or 1 in 10? Certainly makes a difference in your thinking. And in how much time needs to be spent on your decision.
For many issues you can probably get by with a good guess on probability based on your experience. For other issues there may be a historical fact base to reference. In extreme cases such as where substantial rewards are threatened by significant risks, you may want to get into more sophisticated mathematical modeling techniques. In any case, remember that future risk (and rewards) are also linked to probability.
For example: I recently returned from a cruise vacation that included a stop in Costa Rica. I've heard that the tree top zip line was a great adventure and was thinking of trying it. Other family members did it and raved about it. You ride as high as 200 feet above ground harnessed to a gravity driven free wheeling small trolley following a wire cable without any controls other than a leather glove that serves as a brake that might reduce your speed a little.
The risk: The cable, trolley or harness fail and you fall. In that case, given the height of much of the ride, you have a real possibility of severe injury or death. The reward: Great ride described as an adrenaline rush, great scenery and bragging rights to your friends, plus a chance for me to help overcome my fear of heights. The probability of equipment failure, serious injury or any injury for that matter -- remote.
Yes, I did it. Click here to see pictures.
But I did get a pretty good shock. I'll tell you about it tomorrow.
Copyright © 2009 Daniel W. Pelley
All rights reserved.
Showing posts with label risk. Show all posts
Showing posts with label risk. Show all posts
Friday, January 23, 2009
Thursday, January 22, 2009
Downside Risk
I often hear from managers having difficulty making decisions. There may be many causes for this, but the end result is a strong sense of insecurity. "Will I make the right choice?" Will I do the right thing?" "What if I'm wrong?" The result: excessive worry. stress. procrastination.
When you find yourself in this situation, use the concept of downside risk to help make your "go/no-go" decision. Ask yourself this question: "If I make a 'go' decision and its totally wrong, how bad (damaging) will it be?; i.e., What's the worst case scenario if I'm wrong?" The answer to that question will help you decide how much time and effort needs to be put into your decision.
For example: You may be agonizing over trying a new procedure. Will it work or won't it? Should you or shouldn't you? Assessing your downside you conclude that you might waste an hour of time, $25 of materials, and suffer an "I told you so" from the skeptics. In that case you'll most likely get on with it and see what happens. (Of course if your boss is the ultimate nitpicking critic who watches every minute and every nickle, then you already probably already made a no-go decision.)
On the other hand, if your downside is a waste of an hour, $25 of materials, the possibility of trashing a $50,000 piece of equipment and a good chance of getting fired, you'd best put a lot of thought into your decision including getting a good handle on the support from your boss and senior managers for this experiment.
Downside risk quantifies the possibility of failure so you can validly compare it to the rewards of success and creates a rationale for how much time and effort needs to be put into your decision.
Copyright © 2009 Daniel W. Pelley
All rights reserved.
When you find yourself in this situation, use the concept of downside risk to help make your "go/no-go" decision. Ask yourself this question: "If I make a 'go' decision and its totally wrong, how bad (damaging) will it be?; i.e., What's the worst case scenario if I'm wrong?" The answer to that question will help you decide how much time and effort needs to be put into your decision.
For example: You may be agonizing over trying a new procedure. Will it work or won't it? Should you or shouldn't you? Assessing your downside you conclude that you might waste an hour of time, $25 of materials, and suffer an "I told you so" from the skeptics. In that case you'll most likely get on with it and see what happens. (Of course if your boss is the ultimate nitpicking critic who watches every minute and every nickle, then you already probably already made a no-go decision.)
On the other hand, if your downside is a waste of an hour, $25 of materials, the possibility of trashing a $50,000 piece of equipment and a good chance of getting fired, you'd best put a lot of thought into your decision including getting a good handle on the support from your boss and senior managers for this experiment.
Downside risk quantifies the possibility of failure so you can validly compare it to the rewards of success and creates a rationale for how much time and effort needs to be put into your decision.
Copyright © 2009 Daniel W. Pelley
All rights reserved.
Wednesday, January 21, 2009
Ready-Fire-Aim
Here I go. First day of blogging. Welcome to all who visit. While this blog focuses on first-line (supervisory) management topics, we hope that managers at all levels (and those who aspire to be managers) will find this blog to be useful as well.
So why ready-fire-aim as a first topic?
There are four ways to approach something new. One is to just hold your nose and jump in without any forethought or planning. In that case, you depend solely on luck. You may land in a bed of clover. Or you may land in a pile of stuff. Unless you're related to a leprechaun, probably not a good way to go.
Second way is to carefully research your change, structure your approach, dot your "i" and cross your "t," talk to everyone you can, sort through advice and counsel, set clear goals, develop a specific action plan, and then get on with it. Good way to go. If done right it can eliminate a lot of potential trouble. You'll be more likely to land in the bed of clover. But the process can also be time consuming. Unfortunately it also provides an excuse for procrastination. After all, it's easier to research and talk about "doing something" than actually doing it.
Third way is best described by the analogy of target shooting. No matter how much time you spend lining up a rifle shot, you'll simply never know the accuracy of your projected path until you fire a round and see where it lands. The third approach suggests you get an approximate location of your target, then go ahead fire. You're not firing blindly because you know roughly where the target is, and the result of your shot will give you feedback on your chosen path.
Fourth way is to balance approaches two and three. Research, get advice, set goals and create action plans until you're fairly certain that you know how to reach your target (ready). When you're comfortable enough to risk it, get going on it (fire). Then check results against the target, adjust the process (aim), and fire again. Continue until you hit the bulls eye (or your bed of clover).
The key to the fourth way is to be comfortable with your risk level before firing by thoroughly understanding the ratio between how well you've prepared (reward) and the potential of what you've overlooked (risk). A key part of that assessment should be a management concept called "downside risk." What's that? Visit us tomorrow. Its my next post.
So here I am on my first day and I just fired off my first post. Not totally unplanned or unprepared (I did get ready). But once I committed to having the blog, I have moved fairly quickly (and fired). What I don't know is how well I aimed. Whether or not I'm on target. If you'll respond by filling out the survey (at the top of the right hand column) and/or sending a comment, that will surely help.
Copyright © 2009 Daniel W. Pelley
All rights reserved.
So why ready-fire-aim as a first topic?
There are four ways to approach something new. One is to just hold your nose and jump in without any forethought or planning. In that case, you depend solely on luck. You may land in a bed of clover. Or you may land in a pile of stuff. Unless you're related to a leprechaun, probably not a good way to go.
Second way is to carefully research your change, structure your approach, dot your "i" and cross your "t," talk to everyone you can, sort through advice and counsel, set clear goals, develop a specific action plan, and then get on with it. Good way to go. If done right it can eliminate a lot of potential trouble. You'll be more likely to land in the bed of clover. But the process can also be time consuming. Unfortunately it also provides an excuse for procrastination. After all, it's easier to research and talk about "doing something" than actually doing it.
Third way is best described by the analogy of target shooting. No matter how much time you spend lining up a rifle shot, you'll simply never know the accuracy of your projected path until you fire a round and see where it lands. The third approach suggests you get an approximate location of your target, then go ahead fire. You're not firing blindly because you know roughly where the target is, and the result of your shot will give you feedback on your chosen path.
Fourth way is to balance approaches two and three. Research, get advice, set goals and create action plans until you're fairly certain that you know how to reach your target (ready). When you're comfortable enough to risk it, get going on it (fire). Then check results against the target, adjust the process (aim), and fire again. Continue until you hit the bulls eye (or your bed of clover).
The key to the fourth way is to be comfortable with your risk level before firing by thoroughly understanding the ratio between how well you've prepared (reward) and the potential of what you've overlooked (risk). A key part of that assessment should be a management concept called "downside risk." What's that? Visit us tomorrow. Its my next post.
So here I am on my first day and I just fired off my first post. Not totally unplanned or unprepared (I did get ready). But once I committed to having the blog, I have moved fairly quickly (and fired). What I don't know is how well I aimed. Whether or not I'm on target. If you'll respond by filling out the survey (at the top of the right hand column) and/or sending a comment, that will surely help.
Copyright © 2009 Daniel W. Pelley
All rights reserved.
Subscribe to:
Posts (Atom)
Posts
