Causes of Risk
Consider the following common issues that you may face in your life:
- Your car won’t start and you have an important meeting at work in an hour.
- A storm damages the roof on your home.
- You live on a creek, and excessive rains are causing the creek to flood into your yard.
- There is a minor accident on the highway leading to the airport, and you may miss your flight.
- You are managing a project, and you just encountered an unplanned expense.
- You are managing a project, and you discovered that a major supplier will not work for your organization after your project is complete.
Each of these common issues is considered a risk before it becomes an issue. In some cases, you may be prepared for these issues because you saw them as risks and you planned for them. For example, perhaps you knew your car was not reliable but that you must arrive at work on time each day. You might prepare for this situation by installing a ride sharing app on your phone. That way, if your car doesn’t start, you can have a driver pick you up in just a few minutes. Consider the second issue. In this case, you may have purchased wind insurance in the event that a storm damages the roof on your house. In the case of living on a creek, you might elevate your home eight feet above the ground because you knew that the creek had a chance of flooding seven feet or less based on historical data. In the case of the possible missed flight, you would likely check for travel delays before you left for the airport and would choose an alternate route if necessary. In the case of a supplier that will not continue doing business with your company, you report the issue to the organization’s leadership. This is not a risk to your project but is a risk to the organization. As a project manager, you understand that projects face many unknowns, and so you set aside a contingency fund to account for unanticipated expenses.
In the case where you purchased insurance, you were transferring the risk to the insurance company. By paying a small fee (in comparison to potential losses), the insurance company accepted all risk. Where you had a contingency plan (using a ride sharing app and setting aside a fund if a project goes over budget), you accepted those risks knowing that you could implement the contingency plan if the car did not start or if you were met with unanticipated project expenses. For your home on the creek, you mitigated the impact of any flooding by elevating your home. By taking an alternate route to the airport, you avoided the risk of missing your flight. By reporting the supplier who plans to stop doing business with your company to your company’s leadership you escalated the risk. Transfer, accept, mitigate, avoid and escalate are the five common ways to respond to threats (negative risks).
In this Discussion, you will consider the concept of risk and the perception that we are often blindsided by things that “we never saw coming.” This is otherwise known as the “black swan.” Read Chapter 4 in Fundamentals of Enterprise Risk Management (Hampton, 2015).
With these thoughts in mind:
Answer the following:
- Briefly describe the concept of the black swan.
- Explain why you either support or dismiss the concept of the black swan.
- Describe a personal or work-related example/evidence to support your opinion.
- Explain why you believe the example you provided was or was not unforeseeable.
- Explain how formal risk management may increase awareness and control over risks.
References:
Hampton, J. J. (2015). Fundamentals of enterprise risk management: How top companies assess risk, manage exposure, and seize opportunity. New York NY: American Management Association.
Chapter 1, “Hazard and Enterprise Risk Management” (pp. 3–14)
Project Management Institute. (2017). A Guide to the Project Management Body of Knowledge (PMBOK® Guide). Sixth edition. Newtown Square, PA: Author.
ANSWER PREVIEW
The term Black Swan was pioneers by a finance professor Nassim Nicholas Taleb, according to him, a black swan is an occurrence or an event that deviates entirely from what is typically expected of a situation and is hard to predict. Black swan events occur randomly and unexpected. Hampton (2015), in his book The Black Swan cites that a black swan must fulfill the following three conditions. First outlier risk which means there is a potential within the realm of reasonable expectation based on the people perception of the event. Secondly, an extreme impact which means that the…
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