The Hidden Role of Risk Perception
Effective risk management is the heartbeat of every thriving business, steering it toward stability and success. Central to this process is risk assessment, where we measure the probability and likelihood of the identified threats. In an ideal world, risk assessment is an exercise in objectivity and careful prediction. However, an array of non-rational factors color our risk perception and subtly influence decision-making, including:
Dread: If the outcome is particularly terrible, our perception of the risk increases. For example, if a risk might lead to bankruptcy, we tend to overestimate its probability.
Choice: Voluntary risk-taking is seen as less threatening than forced risk exposure. For instance, a company voluntarily implementing a new IT system perceives the risks as lower compared to a situation where it is mandatory due to regulatory changes.
Novelty: New, unfamiliar risks are usually perceived as higher than known ones. For instance, new cyber threats have emerged as technology evolves, such as advanced phishing attacks or ransomware. Businesses typically assess these new risks as higher than familiar ones, like traditional viruses.
Publicity: High media coverage of a risk amplifies its perception. For example, if the media is running stories on corporate data breaches, these will be perceived as higher risk.
Risk-Benefit Trade-off: People tend to downplay risks that offer a highly desirable perceived benefit. We often see this when a corporation over-invests in a hot new technology like blockchain.
In all of these instances, non-rational factors can distort our ability to objectively assess the level of risk. Recognizing these factors helps us develop more accurate risk models and more appropriate mitigation strategies.
Risk Register by ProjectBalm is a proven tool that helps you record and manage your risks.