Risk aversion is the enemy of innovation
Roger Mullin, an authority on judgement and decision making, offers a personal view on why we need to develop a better understanding of risk.
Skills for innovation
Once upon a time, well 1960 actually, Burns and Stalker published "The Management of Innovation", a book that was on student reading lists for many years. My reading of it suggested that there were some key skills needing to be harnessed in the interests of innovation. These included:
- Analytical skills, to aid in the analysis of problems.
- Creative skills, to aid in thinking about solutions.
- Networking skills, to bounce ideas around and learn from others.
These might lead to the possibility of innovation, but for it to happen, individuals and organisations need to be supported and confident enough to set about the "application of novelty". This simply means trying out and applying new ways of doing things or new products. This will be easiest in a supportive environment, whether at home, with acquaintances or at work.
The 'risk industry'
However, the application of novelty, in some of my own studies for organisations, does not automatically follow even if good and workable new ideas have emerged. The problem is the power in the modern world of "risk aversion".
The risk industry, which has emerged over the last 20 years or so, permeates many facets of life. It assumes risk is a bad thing. The aim is to reduce or eliminate risk. The claim is that a risk analysis will help in making informed decisions. I particularly disagree with the latter point, and am generally opposed to the way in which risk is used. Let me explain.
Chance versus negative outcomes
Generally, when people talk of risk, they are talking about two very different things at the same time. First they are talking of chances, or the probability that something is going to happen. But second, they are usually talking of that something, the outcome, being a bad thing.
Thus when we talk of walking across a road being risky, it is because we think there is a chance of being knocked down. It is rare to hear someone say "That's a risky thing to do" when they mean there is a good chance of being successful.
Therefore, when dealing with risk in an innovation or decision-making context, it makes sense to separate out the chances of something happening from the resulting outcome. Doing so can be revelatory.
Weighing up the risk
Many years ago, I was considering starting up my own business and leaving a senior, well-paid job in the education sector. I was told by many this was very risky. I disaggregated risk. It seemed I had about a 30% chance of my business failing within three years: not a good outcome.
That was "risky". But because I had disaggregated the concept I knew there was a 70% chance I would achieve a good outcome (be happier and financially OK).
However, I also thought about staying where I was (not innovating in this context), and reckoned there was only a 10% chance I would get job satisfaction in the future and, therefore, a 90% chance I would get a bad outcome. So, rationally, I resigned the next day and am here to tell the tale. I didn't take a risky decision, I took a rational decision.
I believe it's important to better understand the concept of risk and how to make rational decisions. However, this is currently rare to find in educational programmes.
This presents a challenge for NESTA in supporting the development of education programmes, where risk and decision-making are properly understood and dealt with in the context of encouraging innovation. Risk aversion is the enemy of innovation.
Roger Mullin
Roger Mullin is Managing Director of Inter-ed Ltd, which has 20 years experience of providing research and consultancy on aspects of decision-making. Roger is author of a number of publications in this field and is currently teaching risk on the University of Stirling's MBA programme.
See Also
Article: Learning is a risky business
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Comments on this article
Added: 17/03/2008 3:39pm
Graham Jeffery
I've written quite a bit about this issue, in relation to the cultures of educational institutions, in my (NESTA-funded) book 'The Creative College' and on my <a href="http://tinyurl.com/25hz9b" target="_blank">blog</a>