A Few Things Every Manager Ought to Know About Risk

Every manager ought to have a grounding in risk and its near kin, decision theory, in order to make intelligent business decisions. Managers view risk in a limited way--four out of five managers think of risk in terms of negative outcomes only, instead of as the distribution of all possible outcomes. Risk should be considered in three different categories: 1) risk as hazard--managers should place their emphasis on minimizing negative events; 2) risk as uncertainty--managers should study all possible outcomes with an eye toward reducing the variance between anticipated outcomes and actual results; and 3) risk as opportunity--managers must assess the risks inherent in opportunities, for taking too little risk can be as much a management failure as taking too much. Opportunity risk reflects the upside and emphasizes innovation, initiative, and entrepreneurship. In fact, the most successful managers take the most upside risks.