Guest Blog by WPO London Chapter Chair, Sue Stockdale
The issue of risk pervades modern business life in many different ways. From the rules and regulations that are imposed by governments in response to potential threats or hazards, to the communication of messages in the media around potential risks and the impact of those messages have on the entrepreneurial community.
Information does play an important role in how we evaluate risk, because people would rather choose an option with fewer unknown elements than one with many unknown elements. This is known as ambiguity aversion[i]. For example, if you can remember a lot of media coverage about recent air crashes, then it’s likely to aversely influence you when you are planning travel.
The availability of information technology can also be useful in helping entrepreneurs get an early warning of potential risks and then take action. The World Development report 2014[ii] highlighted that farmers in Ghana and fifteen other African countries now receive specific market information through their mobile phones that helps them respond more quickly to changes in demand or prices.
Technology can also bring unexpected benefits to individuals as well as reducing risk. When M-Pesa[iii], a mobile phone based money transfer and micro-financing service first launched in Kenya it helped reduce the risk of money earned by women either being spent or getting into the “wrong hands.” When cash was the currency, often the men used their wife’s money to buy alcohol or other personal items. But without easy access to cash any longer, this problem reduced, and the women also benefited because they were more likely to save the money to build up financial resources for future needs, such as sending their children to school.
Is the economy becoming more risk averse?
In 2013, a Wall Street Journal article[iv] reported that the US appeared to be turning soft on risk, and as a result the economy became less dynamic. Fewer people were changing jobs, investors were putting less money into new ventures, and companies were slower to take on new staff. It is these types of activities that allow an economy to adapt to the needs of a changing market.
Yet from others’ viewpoints, it seems that the risk taking spirit still prevails. However, it seems to be focused on specific industry sectors and geographies. According to Dane Stangler, Director of Research and Policy at the Ewing Marion Kauffman Foundation[v], it is in coastal cities and college towns, where entrepreneurial talent are willing to take risks, particularly if there is a technology or energy focus.
So it seems that your viewpoint is influenced by the technology and information that you access.
Quantifying potential risks
From a business perspective, whilst identifying broad areas of risk may seem easy to do, quantifying them is often more tricky. And if you take into consideration the broader sociopolitical and geopolitical influences, it becomes even more difficult.
There are now specialist companies, such as Delta Economics that help other businesses to quantify risks by using their leading edge technology for modelling. In my latest book on the subject of Risk[vi], founder and CEO, Dr Rebecca Harding comments on this issue. “Increasingly. people want us to provide assessment, analysis and quantification of the type of risk they face, particularly geopolitical risk because it impacts economic and trade growth the most, and that impacts the way that businesses operate.
Take Thailand as an example. It was a mint economy and was seen as one of the growth prospects a few years ago, but with the political crisis, we forecasted that trade growth would decline because investors did not want to put their money there. There are similar situations in Russia and Ukraine, and in Nigeria. There have been successful growth stories, but where there is geopolitical risk, people want some quantification of risk. By using trade data, as well as analysis of the market, pricing, political environment, and even the social media aspect, we can give companies a quantifiable number that they can factor into their own risk models and then calculate the insurable risk, which can make their environment more certain”.
Finally, one thing is clear that whilst technology is increasingly used to help entrepreneurs to assess risks, it still does not take away the human aspect in terms of how each person interprets the information that is provided, and that will impact decision making depending on their individual attitude towards risk.
Adapted from “Risk” written by Clive Steeper and Sue Stockdale, Hodder & Stoughton, 2015
Sue Stockdale is Chapter Chair for the London WPO and is a Motivational Speaker and Executive Coach working with leaders worldwide. She was the First UK woman to ski to the North Pole and is author of eight business books including Secrets of Successful Women Entrepreneurs and her recent title Risk: All That Matters
[ii] World Development Report, 2014, ‘Risk and Opportunity: managing risk for development’ econ.worldbank.org
[iii] White, Danielle, “The Social and Economic Impact of MPESA on the Lives of Women in the Fishing Industry on Lake Victoria” (2012). Independent Study Project (ISP) Collection. Paper 1246.
[iv] [iv]Risk Averse Culture infects US workers and entrepreneurs, Ben Casselman, June 2, 2013
[vi] Steeper, C; Stockdale, S, “Risk” (Hodder & Stoughton, 2015)