In the book Freakonomics, the authors present data to support the fact that more children are killed by drowning in backyard pools than by handguns. However, as parents we are more likely to not permit our kids to go to Billy’s house because his dad has a handgun than to Suzie’s house because she has a swimming pool.
We do this because in our minds, some risks are greater than others because we lack the right data.
Against that backdrop, let me tell you about the dishwasher.
A few years ago, we received a letter from our appliance manufacturer that our dishwasher could start a fire if water got into the wiring. They did not recall the product but offered us some money to have it repaired. My then-wife immediately decided that we would stop using the dishwasher immediately and wash everything by hand.
The Riskczar in me thought this was a poor decision and here’s why: There will always be a risk that any dishwasher could catch fire but the likelihood of that event is quite small of course, especially for reputable brands like Whirlpool or GE. But like the parent in the Freakonomics example above, she placed an inappropriately large likelihood on this risk: 100%.
Truth is, the Dishwasher-Fire Risk did not manifest itself the moment that the letter arrived in the mail – it was always there. It only manifested itself in her mind. In hindsight, the risk was there when I bought the dishwasher and equally there the day before the letter arrived. But as soon as she learned that this risk existed, she assessed the likelihood at 100% and stopped using the machine. Hand washing followed for a number of months.
The value behind enterprise risk management is that we assess the impact and likelihood of all your risks as a portfolio of risks based on qualitative or quantitative data for the purpose of prioritizing the ones we should treat first. Without the rigor of a proper risk assessment you will treat the wrong risks first or apply an incorrect risk treatment.
For example, rather than not using the dishwasher ever again, alternate treatments may have included using the dishwasher during the day when you are home, purchasing additional house insurance, or buying a new dishwasher.
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