6 Rules for Managing Risk

May 18th, 2017

Rule 1: The first rule of managing risk is to understand the value of today and how the future could impact those values. It is essential to measure how future change will create different scenarios and how they will impact today’s values.

Rule 2: is to decide on reasonable time horizons that fit your situation. Each situation will have a different impact on the time horizon. Getting the right fit is essential in making choices for the future.

Rule 3: is selecting a range of scenarios and possibilities that describe possible future events. This step means exploring both negative and positive possible outcomes. Try to assign values to each scenario in addition to the likelihood that it could happen.

Rule 4: is picking a benchmark for performance. This will help you evaluate the range of scenarios.

Rule 5: is weighing all the possibilities to determine the potential impact the scenarios might have on future values.

Rule 6: boils down to deciding on how much risk you are willing to accept after applying the various scenarios to future and current values.

Some thoughts and considerations:

Think about the possible upside to any decision in addition to the downside. Consider what could happen, the impact it could have, and the likelihood that it could happen. This step means really digging into the full range of possibilities. Most people don’t go far enough with this step.

What is your attitude toward risk? Is it high, medium, or low? This requires honest evaluation about the reality of your attitude.

Focus on the future – Not the past. The past might provide clues to the future, but things are never going to be the same. Change will occur. The past is over and your concern needs to be on the future. This is why it is essential to project yourself into the future.

Create Win/Win scenarios. This requires finding minimum payoffs that provide a positive risk-adjusted value that motivates another party to agree to the terms of the deal.

Effective utilization of these six rules allows you to be less likely to be surprised by unexpected outcomes. It is impossible to anticipate everything, but a more systematic approach to risk management helps to prevent disastrous results. Applying the 6 rules represents a better way to make tough choices.