Risk is a necessary element of managing an organization. From hiring new employees to deciding on which ventures to pursue, each leader faces varying levels of risk each day. The question is, how can you determine how well you manage this risk? Here are a few ways to assess your understanding of and you tolerance of risk:

1. Start by understanding the four components of risk

Here’s a working definition of risk:

Risk is the probability that exposure to a hazard will lead to a negative consequence.

Note the four components in a non-technical explanation: 

• Hazard – something bad that might happen

• Exposure – you or someone made a decision that makes the hazard a possibility

• Probability – you can calculate the chance of the bad thing happening

• Consequence – the severity of the bad thing

Imagine it is cloudy outside and the weather forecast shows a 30% probability for rain today. You have to leave for work soon, so you want to consider the risk of getting wet if you go without an umbrella or rain jacket. 

• Hazard – there is a chance you may get rained on if you go outside

• Exposure – you do not have an umbrella or a rain jacket

• Probability – you are not likely to stay indoors due to a 30% chance for rain showers 

• Consequence – if it rains on you, you will not look presentable for your meeting
  
  

2. Next, understand the difference between risk and uncertainty 

These two terms have been used interchangeably, however, they are not the same:

Risk deals with probabilities that are known, either precisely or to some degree. 

With uncertainty, there are either no good probabilities or they are too hard to calculate. 

Here are a few examples to make the difference clearer. 

• Risk is seen in casinos, slot machines and the lottery all have calculable probabilities. Should you expose your life savings to the lottery? You can calculate the probable outcome before you lose all of your money. 
  
  

• Uncertainty is seen in romance and earthquakes. You can make an educated guess as to whether you should get married or move to California, but you can’t calculate the probability of a long marriage or falling into a crevasse.  

3. Numbers count! 

The numbers involved in assessing risk matter when making a decision. Imagine you are seeking a new talent acquisition vendor to hire for a specialized role in your organization. As you are doing research, one of the vendors you considered received 2 out of 5 stars for customer satisfaction. Do you decide to avoid this vendor? 

Don’t forget to look at the numbers! What if this vendor has only received one review, and there are no details or notes as to why the review was given? In this case, it is better to look for absolute risks instead of relative risks. 

As a leader, how well do you manage risk? What about your employees? To find out, contact the Ascendis Leadership Academy to take the Organizational Leadership Skills Profile. Please contact Sue Drake at sdrake@drakerg.com for an overview of the Profile and ways in which it may be used in your organization.