Risk-Risk Analysis

A frustrated friend complained about manufacturing plants which won’t update their technology. He even knows of plants that use 20-year-old computer systems and think it’s better not to replace them. The result of their risk-benefit analysis tells them that the risk of upgrading outweighs the benefit, and supports their desire to stay with the status quo.

This doesn’t surprise me.

Behavioral economics tells us that people weigh the risks and effort to change higher than the benefits. People would rather not change what they have even if it means missing out on opportunities for gain. Risk and the benefit aren’t in a fair contest in a typical risk-benefit analysis. People give more attention to the fear of risk than the hope of benefit.

A more useful analysis would compare risk versus risk.

What are the risks in not changing versus the risks in changing? What effort will we need to make if we don’t change, versus the effort we need to make if we do change?

In this manufacturing example the risk of not upgrading are the time, money, and energy spent on emergency repairs, sourcing difficult-to-find parts, and unplanned downtime versus the money spent on buying a new system, time spent integrating it into the current workflow, and the planned downtime to install it. We can also compare the cost in more human terms: falling morale, creativity, and flexibility due to an aging system versus the learning curve and temporary drop in productivity while adapting to a new one.

We can make better decisions with a fair comparisons: risk versus risk.

Image: bait / pass at your own riskby Justin Henry under a CC by 2.0 license

What are your thoughts on making a risk-risk analysis for a decision in your work or life? We at SoulCo would love to hear from you!