Risk Management Mistakes Many Executives Make

Business / Wednesday, June 24th, 2020

Risk management is mandatory for every single business executive out there. It practically includes several tasks that are mandatory and that are carried out with the purpose of mitigating the negative situations that might happen in the future and that could affect your business.

Unfortunately, most executives do not know what to do to properly manage risks. This is why we need to take a look at the most common risk management mistakes so that we never make them. Start with the very common ones presented below.

Predicting Extreme Events To Manage Risk

A common misconception is that risk management is all about predictable future extreme events. For instance, you might convert cryptocurrency at a specific point in time by thinking that something extreme will happen in the future. You cannot predict how cryptocurrencies will evolve, just like you cannot predict any extreme event.

As a manager, it is your responsibility to have plans in the event something bad, unexpected happens, not to predict what will happen. Your efforts should be put into managing the consequences of what will happen.

Thinking That History Helps Manage Risks

Another really common mistake is thinking that studying what happened in the past helps to manage risk. You cannot actually predict the major black swan events. Managers do use history to predict some facts related to the future but this should only be done in a correlation with possibilities.

As an example, sales forecasts will always change, regardless of what you do. It is impossible to predict success and business managers have to always be ready to deal with unexpected events.

Not Listening To Advice

This is particularly important when referring to advice about what you should not do. So many managers are focused on profits and how to grow them instead of also thinking about how to avoid losses. Always see profit growth and less avoidance as being equally important. Sure, there are many more stories written about successful events than negative ones but you should not neglect the possibility of something bad happening in the future. Avoid certain risks right now in order to increase the likelihood of being successful another time.

Thinking It Is Easy To Measure Risk

We started to rely way too much on formulas to calculate everything in our lives, including risks. Unfortunately, standard deviation is not that great when it comes to managing and assessing risks. People learn about r-squares, betas, and regression models as ways to measure risk. What they do not learn is that they can be inaccurate. This is due to the fact that the most likely economic event that could happen is not necessarily what will happen.

Not Taking Psychology Into Account

Last but not least, when the business manager relies too blindly on mathematics, it is easy to lose sight of the psychological nature of human beings. Whenever you try to take into account risks of basically doing anything and you only look at things from a mathematical perspective, it is very easy to miss out on the fact that people do not always do things in a mathematic way. One’s individuality counts.

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