Most CIOs and technology organizations are terrible at taking risk. Most executives say, “I’d be happy if I can manage risk to zero.”
According to Jim Vaselopulos, in his talk called, “Driving Innovation by Balancing Risk & Opportunity,” you can’t manage risk to zero. Jim Vaselopulos, a Senior VP at PSC group, presented his talk at our 4th annual Technology Innovation and Leadership Summit.
Jim noted that when you think of risk, it has downside and the risk of failure. Reward has upside. Opportunity — that’s the other side of the equation.
Jim introduced us to the concept of Prospect Theory. This theory was discovered and written by Daniel Kahneman and his partner. They won a Nobel prize in economics for this book. One of the key concepts of Prospect Theory is something called Risk Aversion. Most people are wired to look at more risk than reward. We have an unbalanced view to look more at the Risk than the reward. This makes us all risk averse.
But an investment can have both loss and return. Business people look at the returns, NOT just the risk. They realize there are risks, but business people are looking for the return on the assets. Assets have returns. This is how we evaluate investments in assets.
CIOs tend to focus only on the risks. You have to evaluate the opportunity WITH the risk. We need to evaluate the opportunity because you can’t properly assess the risk. Risk is only half the equation!
The one quote Jim stressed we should all learn is:
“Managing Risk to Zero simultaneously manages opportunity to zero. If you think your goal is to manage risk to zero, you have simultaneously managed opportunity to zero.”
The more you do this the more you cripple your organization because your team will be too concerned about the risk. You will slow down innovation!
If you want to be innovative, don’t manage risk to zero!
Instead, learn how to evaluate opportunity. How do you do this?