Ruminations on Risk and Reality

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Risk Communication Best PracticesLee Beachy 2009

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Ruminations onRisk and Reality

A brief discussion about thechallenges of discussing risk.

Lee Beachy

Laconia Savings [email protected]

www.linkedin.com/in/lelandbeachy

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It must be a matter of perspective!

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But! Calculated Risk = Profit

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Risk & Profit Fuel Capitalism

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My Perverse History: Risk Voyeurism

Forensics can be fascinating!

My well-worn copy of the WarrenCommission Report (1960s)

Three-Mile Island (1970s)

NASA disasters (1987; 2003)

Challenger

Colombia

9/11 Commission / Twin Towers

NTSB Accident Researchhttp://www.ntsb.gov/Publictn/publictn.htm

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A Few Basic Premises:

We canlearn from past mistakes

We canavoid bad things with better

communication

Sloppy communications dohaveconsequences

Hard to grasp realities can however still becommunicated

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The Risk Landscape of Banking

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If you Alliterate, You Must Need a Logo

Effectiveness

Efficiency

Excellence

Ethics

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Effectiveness How do we communicate risk?

Theoretical, probable, conceptual, causal

The little known or the unknown (but possible)

The unwelcome

How do we arrive at actual risk? What we can know

What we can (but dont yet) know

What we can not possibly know

Snapshots, trends, critical factors,escalators, and summaries

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Risk Perceptions

Factors that change risk perception: Dread

Degree of Control

Anthropogenic / Natural

Choice

Children

Novelty

Awareness

Personal Applicability

Benefit Tradeoff

Trust

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But Wait! There are still more

Cultural differences

Gender

Inter-generational

Language

Past experience

Anecdotes

Media preferences

Etc. Etc.

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Risk Classification Schemes

The Old Standby: High, Medium, Low

Eye of the beholder [usually subjective]

No ability to quantify or calculate [nominal]

Ordinal, Interval and Ratio Schema Ordinal: Ranking (but still non-metric) More granular than HML

Interval: Numbers have relative meaning

Ratio: Numbers have absolute meaning

Develop a means of consistency!

Hard data is good to find!

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Elucidating Risk

How do we measurerisk? The risk analysis process is primarily based on

professional judgment. Macrae

Nonetheless, we have certain obligations:

Make judgments as explicit as possible

Keep ratings / rankings within a framework

Force assessments to the point of knowledge

Review / audit for collaborative perspective

Subjectivity can be tempered by use of ratingkeys containing clear definitions of value

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Risk Language & Communications

Why are language and taxonomyimportant? Reduce inconsistencies

Reduce subjectivity

Support ERM objectives:

Risk awareness

Risk accountability

Risk action-ability

To really manage risk we must be able toarticulate, what is our risk tolerance?but most organizations do not have the metricsor the language to speak clearly to that question.


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The Dilemma of Uncertainty

Known (K) This risk can be identified, enumerated and

quantified

Unknown (u) This risk may be identified and enumerated but

can not meaningfully quantified

Unknowable (U) The existence of this risk or set of risks is not

predictable ex ante, let alone quantifiable

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What are the lessons?

Non-financial risk has moreuncertainty

Our communication should not implymore

certitude than actually exists

We have some challenges! A primarily financial audience may need careful

guidance to understand non-financial risks

Make sure that risk assessment comes out of thebest possible source

Find ways to reinforce the informed expertise of

subject matter experts (SME) Communicate the reality of population

uncertainties! Confidence levels

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The Confidence Interval

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.4750 .4750

X

95%

.025.025

Z1.96-1.96 0


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Efficiency [Risk] communication should begin by

identifying the information most relevant tothe decisions that people face, finding outwhat they currently know, and filling in themissing pieces. Baruch Fischhoff ; Carnegie Mellon

Risk messages are difficult to formulate in

ways that are accurate, clear and not

misleading. National Academy of Sciences

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Realistic Expectations

Many people, especially decision makers, seemto think that well-crafted messages orcommunication campaigns can eliminate orreduce conflicts in risk issues. These individualsbelieve that the conflicts are based on lack ofinformation, that if all the parties were made

aware of the facts, they would agree. Thisoverlooks the possibility that conflicts are basedon factors such as distribution of risks andbenefits, different values, and different goals.

Meaning of Data?

Acceptable Levels of Risk?

Applicability to specific domains?

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The Classic Communications Model

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Yes, Its Complicated!

What Kindof Conversation is this?

Initiative Conversations get things started by proposing a new goal or a

new future.

An active and intentional approach to the future!

Understanding Conversations

support input from, and discussion, the peoplewho will work together toward the goal.

Performance Conversations are based on requests and agreements ask

and promise to get specific about who will dowhat, and by when!

Closure Conversations focus on recognizing accomplishment and

people and cleaning up unfinished business.

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Excellence A Framework for Risk Communication

Consistency

Clarity

Graphics, Diagrams & Representations

Appeal to Dr. Tufte! Few in number, fantastic in content

Appeal to Action or Decision

Let my dataset change your mindset.

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Relationship Matrix

SeverityFrequency

Catastrophic Critical Marginal Negligible

FrequentStop and fiximmediately

Stop and fiximmediately

Correct ASAP Correct soon

ProbableStop and fiximmediately

Correct ASAP Correct soonCorrect

sometime

Occasional Correct ASAP Correct soonCorrect

sometimeCorrect

sometime

Remote Correct soonCorrect

sometimeCorrect

sometimeCorrect

sometime

ImprobableRoutine

maintenanceRoutine

maintenanceRoutine

maintenanceRoutine

maintenance

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An Example: {Ordinal-Interval}

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Priority-Driven Communication

Print &

narrative CSV of tool

output

VendorReport Data

Report byVariable

Follow-upResponses

Access Senior Mgmt

BoardCommittees

ExecSynopsis

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Data Distillation


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31 Distinct Findings637 Separate Instances

93 Management Actions & Dates1 Page = Priceless

Paying Attention to Small Details!

Cascading Sequences can Devastate! Blockage in polisher (water filter)

Moisture leak into air system

Two valves trip cold water flow stops

Backup valves are not open (had been shut)

Backup valve indicator covered by repair tag

Special relief valve (second backup) sticks open

Special relief valve gauge also not working

What are we describing?Three Mile Island near meltdown!

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Watch Your Language!

The Effects of Language Mitigation Command

Obligation Statement

Suggestion

Query

Preference

HintSource: Ute Fischer & Judith OrasanuSee also Outliers, Malcolm Gladwell; Chapter 7

The challenge is in communicating eitherdangeror riskupward in a hierarchy Both personality andculture influence exchange

Reference: Geert Hofstedes Dimensions

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Spectrum

Ethics Poor contextual landscapes

What do they need to know first?

Statistical slants Primary message of the data? Resist the partial

truth of misrepresentative data selections!

Misleading scalar graphics

Data distributions represented?

Risk Comparisons Can these risks be compared in a single

dimension?

Other bias situations?

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Risk Management or Controls?

Control Flavors Preventative

Detective

Corrective

Inherent Risks Residual RiskControls

Holistic Risk Management / Dialog

Encompass entire risk continuum Changing risks

Changing risk tolerances

Avoid control myopia

Inherent Risks Residual RiskControls


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About Statistics

Dont just take statistics as you find them

Use metrics with solid credibility

Favor whole numbers and simple fractions

Employ graphics and charts to present andclarify not to confuse or distract

Strive for comprehensibility and clarity But dont over simplify

Pay attention to other estimates and

understand variances

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About Comparisons

First Rank Chronological comparisons (same risk)

Comparisons with a standard

Comparisons with different estimates

Second Rank Compare acting versus not acting

Compare alternate recommended solutions

Compare similar risk in other environments

Third Rank Compare peak versus average risk

Compare risks with benefits

Compare multiple causalities

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Helpful Links:

Harvard Center for Risk Analysis -http://www.hcra.harvard.edu/index.html

[CMU] Center for Risk Perception and Communication -http://sds.hss.cmu.edu/risk/Home.htm

[LSE] Centre for Analysis of Risk and Regulation -http://www.lse.ac.uk/collections/CARR/

Society for Risk Analysis - http://sra.org/

International Risk Management Institute -

http://www.irmi.com/

Information Presentation: http://www.edwardtufte.com/

FAIR Risk Metrics:http://fairwiki.riskmanagementinsight.com/

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Sources / References:

Kuritzkes & Schuermann; What We Know, Dont Know andCant Know about Bank Risk: A View from the TrenchesWharton Financial Institutions Center;http://papers.ssrn.com/sol3/papers.cfm?abstract_id=887730

Integrated Risk Management Framework; Treasury Board ofCanada Secretariat; http://www.tbs-sct.gc.ca/pol/doc-

eng.aspx?id=12254

Improving Risk Communications; Committee on RiskPerception and Communication, National Research Council;www.nap.edu/catalog/1189.html

Ford & Ford; The Four Conversations, 2009 Berrett-Koehler Publishers; ISBN 978-1-57675-920

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Familiar?

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At which client did the CEO get thisphoto?Or is this intrinsically embedded marketing risk?

Questions / Discussion

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Ruminations on Risk and Reality