Friday, March 14, 2014

When risk avoidance goes crazy

Those who read this blog regularly will know that there are a number of themes or subthemes that feature over time. One is the current Australian obsession with risk, risk avoidance, risk control.

In the public policy arena, I have suggested that this gives rise to decision paralysis, to wasted resources, to bad decisions in general and especially where laws or regulations are imposed to try to control or reduce particular risks regardless of the economic costs. Something similar holds in the private sector and in management in all sectors.

The concept of risk and risk management has a long history. However, in the late 90s and early 2000s it took a very particular form,a professional form. The strongest drivers here actually came out of Government and were promulgated by consultants such as myself as a new field of advice to clients. Now it has become so deeply entrenched that it crowds out anything new. You see, new is by nature a risk.

In my professional roles and in my management writing, I have tried to explain what has been happening. I have found it extremely difficult to get the message across because of the acculturation process in organisations, as well as the institutionalisation of  rules, regulations and processes. Now Australian Reserve Bank Deputy Governor Philip Lowe*has joined the debate.

In a speech particularly targeting productivity improvement, he writes in part:

So if we are to improve efficiency and advance technology then innovation is required and innovation requires someone to take a risk – the risk of trying a different process, the risk of changing workplace organisation and management practices, or the risk of spending scarce resources to explore a new idea. Sometimes the effort will not pay off, but just occasionally it will, and when it does, we find a better process, a more efficient organisational design or an idea that transforms how we do things.

Note the words  “but just occasionally.”  Here Mr Lowe is making two points. Big change involves big risks. Most attempts fail to greater or lesser extent, but when they succeed they really succeed.

My focus is a little different, the constant improvement based on experience of of existing systems. This is the world of incremental change, the change that keeps day to day productivity improvement ticking over. It is in this area that rigid rules, complex decision structures and the need to constantly examine risk and have a very large impact. These things interact.

Mr Lowe recognises that there is a legitimate need for risk analysis and avoidance. However, to his mind these things have gone just too far,     

My own tentative answer is that there has been a subtle, but important, shift in the way we think about risk and innovation. In particular, our preferences appear to have shifted in such a way that we increasingly focus on risk mitigation and risk control. There are examples of this in a whole range of activities in our society – from the nature of the legislation that parliaments pass, to the increase in compliance activities in the nation's boardrooms, to the amount of money we are prepared to spend to limit the probability of blackouts and even to our attitudes about the design of children's playgrounds. In each of these areas, our society has been prepared to limit options or to spend more of our scarce resources to reduce risk.

I want to make clear that I am not saying that this is necessarily a bad thing. Wealthy societies like our own have considerable capability to address risks in a way that poorer societies cannot. After all, that is one of the benefits of economic progress. And it may also be the case that wealthy societies inherently have less tolerance for certain types of risk than do less wealthy societies. So what we are seeing may well be optimal from the perspective of our collective welfare, even if it does not maximise measured economic growth. 

But, at least in my opinion, it is appropriate occasionally to ask whether we have got the balance right. Reducing risks is not always cost free – resources need to be devoted to the task and this means that these resources cannot be used for other tasks. And perhaps even more importantly, it might also be the case that a more risk-averse society is naturally less inclined to support and finance innovation, to implement new processes and to apply new technologies. If this is indeed the case, it has implications for future productivity growth.

These are cautious words. I would go a lot further. I would argue that we have reached the point that our obsession with risk and the laws,regulations, policies and procedures that flow from that obsession have reached the point that they have become a fundamental drag on national welfare.

Our priorities and approaches are out of kilter. In NSW, we are prepared to impose via regulation economic costs of multiple millions to save one life from a swimming pool death when we can’t afford to spend an equivalent amount to save multiple deaths from child abuse. I don’t think that’s very sensible. Do you?  

However, the story doesn’t end there. Our obsession with risk affects every stage in decision processes: it affects just what decisions are made; it affects the way that decisions are implemented; and it imposes an ever increasing burden of monitoring, compliance and reporting. It colours our language and the questions we ask. It creates new legal risks and liabilities that then become embedded in the process. It also affects, diminishes, the responsibility that we are personally prepared to take for our actions and decisions, as well as the way we react to perceived irresponsibility on the part of others. We erect our moats and walls and look out on the apparently lawless plains beyond with a degree of fear.

Wearing my historian’s hat, I can look back and point to the good things that have occurred. The attitude of some mine owners in the Hunter Valley to the personal risks associated with coal mining were at best unthinking, at worst callous. The emerging unions, rightly, attempted to to address this problem and with a degree of success over time. However, that is a very different thing from a world in which “what if” and “what might happen”  have come to dominate. The unions were attempting to address real problems and risks, not “what ifs.”

It is possible to show mathematically some of the costs of current approaches. People will accept that argument. However, as soon as specific cases are dealt with, “what if” emerges. This becomes still more difficult when questions of personal safety are involved. “But” people say in the swimming pool case, “surely it is a good thing to save a life?” Of course it is, but you have to ask how many lives and at what cost?

I think the balance is wrong now and I don’t really see a way of addressing it. 


Anonymous said...

So, economics-wise, are you afraid of risk aversion, or merely cautious about same?

I fear there's a tautology buried in there somewhere :)


Jim Belshaw said...

Good morning tautological kvd. I have extended the post a little. Wearing my economist's hat, I believe that the costs of current approaches to risk aversion far outweigh either perceived or real benefits.

Evan said...

Hi Jim. Complete agreement from me.

The only way I see is getting some really small things happening - so small they can fly under the radar and show big benefits. The problem comes when they need to be scaled up I guess.