I don't gamble but I do take risks

Risk is inherent in a business and can be managed

I was intrigued when someone wrote this comment, "I don't gamble but I do take risks." This is very interesting simply because it opens up a great discussion on the two concepts. First, let's get our definitions right; according to ISO, risk is defined as the effect of uncertainty on objectives. Gambling on the other hand, is the wager of something of value (usually money) on an event with an uncertain outcome with the primary intent of winning more money or goods.

Risk vs Gambling

What's the difference? Risk is inherent in a business decision. It does not take a wager (even if you could technically say all business investments are wagers, but I am not going there right now...) and it is something that can be managed away through prudent decision making. Gambling is the decision itself. No one is forced to take on the risk; it is a game unto which someone plays for possible gain. Hence the wager is the cost to play the game, and there is no way to manage the chance. One either accepted it or not.

Risk, therefore is something that we can manage away. There are many strategies - from hedging, to buying insurance, to posturing. In this article, I would like to share a favourite of mine, as taught in our strategic thinking class - scenario thinking.

Scenario thinking

In scenario thinking, we take a business situation or decision to be made, and identified the assumptions therein. Next, we describe the best case, worst case, and most-likely case scenarios based on the impact of the assumptions. In the best case, that would be a situation when ALL our assumptions were correct. For the worst-case, it would be a situation when all the assumptions were wrong! Finally, for the most likely case, it is not a situation in the middle, but one that was based on most probable outcome.

Next, we do a little posturing. The best case scenario tells us our upside, something that we are working towards. It is nice to have but not necessarily very telling. The most-likely asks us to assess if that is an acceptable outcome. If it was not, then something needs to be done to increase the odds or to abandon the situation/decision althogether. The most telling of scenarios is the worst case. It asks us to assess if indeed it was something we could live with if it happened, and if not, then what we could do to make it better. It also instructs us to look for better solutions to brighten the outcome. Ultimately, if the downside is something that is too catastrophic, then we should abandon that option too.

Scenario thinking is a great way to deal with uncertainty and to mitigate risks. If you have not done it before, do give it a try.

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