quantmleap

In part 1 of this article I raised a number of risk related observations, particularly around the validity of Murphy’s Law as well as the reality behind the Law of Averages.

Another series of Scientific American articles (sorry but I’m a real Scientific American fan), titled “Why Our Brains Do Not Intuitively Grasp Probabilities” and “How Randomness Rules Our World and Why We Cannot See It“ describes the concept of “Folk Numeracy” which is “our natural tendency to misperceive and miscalculate probabilities, to think anecdotally, instead of statistically, and to focus on and remember short-term trends and small-number runs”. In a nutshell, we are evolutionarily evolved to clearly notice short term trends but are predisposed to forget or ignore long term trends. The author of these articles goes on to suggest that our intuition has evolved in a manner which enables us to utilize this capability in the context of social interactions and social relationships (which means that our intuition does play an important role in our ability to form alliances and identify social path that could be of some usefulness to us)  we are nevertheless ill equipped to use this capability when it comes to probabilistic problems.

In “Knowing Your Chances” (Scientific American Mind – April/May 2009), the authors make a reference to an early book published in 1938 by the English writer H. G. Wells, who predicted in his “World Brain” that statistical thinking would become an indispensable trait, similar to reading and writing. This prediction, however, has not materialized and the authors of the article make the observation that “At the beginning of the 21st century, nearly everyone living in an industrial society has been taught reading and writing but not statistical thinking – how to understand information about risks and uncertainties in our technological world.  That lack of understanding is shared by many physicians, journalists and politicians…and as a result, spread misconceptions to the public.”

So what does it all mean?

We are all naturally pre-disposed to a certain level of Risk Attitude. Risk Attitude (as defined by David Hillson & Ruth Murray-Webster) is a “chosen state of mind with regard to those uncertainties that could have a positive or negative effect on objectives, or more simply a chosen response to perception of  significant uncertainty”.

Josh Nankivel, based on a podcast by Cornelius Fichtner (which I thoroughly enjoyed while preparing for my PMP) gives a good summary of the commonly referenced Risk Attitudes (a complete copy of which is given below):

1. Risk Seeker – enjoys and seeks uncertainty in search of greater opportunities, can be overly optimistic and not take possible negative consequences seriously.
2. Risk Averse – uncomfortable with uncertainty, doesn’t like risk
3. Risk Tolerant – reasonably comfortable with uncertainty, but usually sticks head in the sand and ignores them
4. Risk Neutral – analyzes risks and weighs negative/positive possible outcomes and probabilities objectively.

Josh makes the observation, which I tend to agree with, that most project managers will tend to be Risk Tolerant. They will conduct basic Risk Identification process early in the piece but then rely on their gut-feel and ‘lets hope for the best’ approach when faced with reality. Josh goes on to suggest that the Risk Neutral is the goal and he is probably (excuse the pan) correct. The problem, as indicated above, is that for most of us this will require conscious effort and elaborate attention to details we are not naturally inclined to adopt.

Formal adherence to Risk Management processes can cut through the complexity and the PMBOK is certainly a good place to start as it refers to the basic tools and techniques required to ensure you manage your risks adequately.

Related posts:

1. Some Risk Management related thoughts – Part 1
2. Earned Value Management (EVM) for Dummies – Part 1
3. Earned Value Management (EVM) for Dummies – Part 2
4. Monte Carlo Simulation for Dummies