A commonly known fact about risk is that it did not occur, yet, and it may never happen at all, and while this property is fundamental to its concept. It’s a necessary misrecognition in this determination, which includes in itself contradictions, fear and hope, mediates into form which manifests itself as risk. On the other hand, choice presents itself as a necessary condition which precedes risk, and as such this relation relationship, between choice and risk, presents itself as an accidental and interdependent formulation, existing in this linear necessity.
Choice is as such an independent phenomenon of risk, which is culminated in achievement of desired position, and operates across materialistic or abstract developments. Choice is simply — selection, a representation of will which after completing circle of analysis, options, judgement, plans, as such its a path which one takes. This act of taking, is manifestation of will represented in selection. The fundamental condition of choice is alternatives so as such one can only select, however choice is also within a frame of action where one can take an action immediately, or alternatively defer it, which is another representation of choice, but still within its form presented as selection. Choice can be observed operating on many levels, through many conscious and automatic functions, for example one can observe choice as having a tattoo as an expression of one’s freedom, while one is in reality bounded, this choice represents an abstract expression independent of materialistic reality. It is a function of will, if one wills one chooses, and under influence of this will, one can observe this grasp of will, which operates on process of making a choice, manifested as action after the choice, will overrides its linear cause and effect context but still remains under the act selection, or in other words, selection is manifestation of will.
In respect of risks in relation to these choices, works such as COSO, ISO 31000 present this linear relation as an essential condition, including processes for identifying risks, measuring, ranking and treating these otherwise undesirable possibilities; as such their primary function is to decrease fear of failure and and increase hope for successful outcomes. These frameworks describe risks in context to the choice, and as such risk is dependent on choice, and otherwise its meaning exists as a vague description of uncertainties. Choice is described as an objective in framework of risk, and risk as a threat to these objectives, and in in this way risk loses its meaning if objective moves away from its given position.
If we analyze underlying elements of choice we find its rooted in choices made in past, and its apparent immediacy disperses into desired position, to the point of one making the choice; this one therefore becomes a critical element of choice. In this way, the current choice appears as a step moving towards other choices, and as such this cycle of choices operate at multiple levels towards the ultimate outcome, and are rooted into need. In its simplest form, this development can be seen as need leading to a choice, choice leads towards the ultimate objective. This in fundamentally represented in cause and effect relationship, where a cause leads to effect, and the choice exists before these elements, however cause can also be seen as preceding the choice, and effect following the choice, and choice is then between cause and effect. In analyzing this relationship of choice and risk, risk follows the choice, or it can be said that risk occurs with effect, and can be seen unrelated to cause; this is consistent with the frameworks for management of risks. In this way, objectives drive risk management in linear development; one must set objectives, only then one can identify risk and then do something about it, and so on and so on.
Every some years, we read some successful companies bust; it can be safely assumed that it’s not their lack of knowledge of risk or its management, their failure is mostly appropriated with choices made by Management. Here, a logical counter argument would be, that these choices, which ultimately led to it’s disaster, were cherished as good decisions at the time of making these decisions, and that this claim, calling these choices bad, only can be made looking back in time, with this vantage point was not available before.
Here, I claim, is the fundamental failure of risk management frameworks; if I can briefly describe it, the objectives were set, risks were identified, treated, monitored and managed, however this framework could not manage the risk, even identify, choices leading to the ultimate risk, ruin. As describe in the opening lines, risk is something which has not happened yet, and as such essence of its management is identifying and managing what may happen in future, at least, identify and manage ruin! This is a towering demand for this system, mainly because its structures hides away the symptom of ruin, indicators which signal taking a detour to avoid an accident, by taking objectives as a constant, unchallengeable position.
More precisely, this system does not assess the risk in the objectives itself, its focus is risks related to execution of the selected objectives. These objectives, assumed as a constant, an unchallengeable position, from which this system of risk management first moves to identify threats (to the objectives) and then create actions which control these threats, entirely ignores the risk in the objective itself. This system of risk management is structured to deal with threats to execution of the objectives, presented as its ultimate goal, that is, if the objectives are not achieved; but not to if objectives fail to create desired position, which lies outside its system. In this system, objective must exist effect, to fundamentally shape choice, but does not address cause. On the other hand, risk existing within this constant is hidden away by its mechanisms, which focuses away from its development into execution, and the latter becomes its very ground, the foundation of this edifice, challenging which destabilize the system of risk and choice. To analyze fundamental risks to choice, we must move to another vantage point, and observe process of forming a choice.
As choice in its simple form appears as selection, this appearance is only culmination of the process of making a choice. In its extreme simplicity, if one is thirsty, one can simply drink water, or you could also say he chooses to drink water. Taking it slightly further, in social-religious context, one doesn’t drink water even if thirsty when one is fasting. In both cases one makes a choice of drinking or not drinking within a given context, its meaning rooted in need. The latter takes shape of conviction, that is, if even one is thirsty, one’s (religious) convictions override this need, in other words choices are embedded in earlier choices, holding in earlier choices, in this case subject makes a choice to fast, but then, when thirsty, chooses not to drink water, and this choice is embedded in the first choice to fast, and as such not to drink water is needed to fast. This simple development of process of choice, in its minimalist form, illustrates choice is not an independent deliberate action, its culmination of other choices made earlier or simultaneously, which forms this choice.
If choices are interdependent on earlier choices, does this circle have an opening and an end? the opening is the need, the primary need, and conclusion is the ultimate objective, however this a choice is n context, if for one a choice is an objective, for the other one’s choice can be a need, which generate other choices. In making its determination, choice is strictly seen in context of the one making the choice, which becomes the reference point of the choice in this process. The context influences this reference point of need, for example if we assume our subject is sitting in a comfortable house with convenient access and means to quench his thirst, which is different than being in Saharan desert with limited access to water and clearly limited alternatives and means to satisfy his thirst, although the need is the same, its a different need, as such empty, filled by its meaning through context.
In a slightly more complex formulation when an alternative is added to a choice, the analysis moves away from action-conviction into preference, changing process of choice. This move, in itself, is not the culmination point, the process of choice which now moves between between two, or more alternatives which shape its further analysis, is present in the earlier form, when has not alternatives, but simply wills — choses.
The process of analyzing alternatives is an experiential output represented by inputs, resources, implications, potential outcomes, between options. However, this determination is not complete until preference influences the movement away from need, in doing this preference must include need although it moved away, its total subtraction collapses the analysis of alternatives, leaving back choice as simple need. For example when one considers alternatives which equally satisfy the need for example water and cola, which can both quench thirst, one’s choice then is influenced by preference, as one moves away from need, yet this development must include in itself satisfaction of need in both alternatives, if one object is not seen as such, the preference collapses into need.
In context of choice and risk, Prospect Theory (Danial Kahneman) is a good reference for analyzing a force which influences one’s choices and risks one is willing to take, or rather avoid in making these choices. It’s fundamental point is that people are generally more risk averse, which means we prefer choices which minimize loses over maximizing gains. This correlates with preference (biased behavior towards risk) and need, externalizing itself as a force in process of making a choice.
This other is a reflection from larger social network and as such like the force described in the preceding para, acts on the process of making a choice. Although choices can be seen to be made independently, this formulation of the other, its force, influences the need by adding meaning, shaping preference, and as such becoming its appearance. It comes closer to the idea of defensive decision making, which is making decisions which one can defend, and in movement, the other becomes shape of preference.
Both forces, in shaping the preference, mediate risk as an element of making choice through, on one hand, one would be minimizing loses, and at same time forgoing option representing highest value; and on the other hand, one is influenced by this other who is reflecting on one’s decisions. Risk(s) in relation to need is mediating its determination through choice, does not separate itself from this act of selection.
Acceptance of risk in a choice, does not take away the forces which are acting on the risks, in other words, if one has made a decision by avoiding loses, and under influence of the other, the risk in the choice being wrong does not go away. This risk is lurking within the choice, while one has accepted risk in relation to execution, certain critical dependencies of the choice. In an evolving situation where choices are made in a sequence, this development also moves in similar pattern, however, risk is changing with every choice, as every selection limits the options available from that point, and risk of making a wrong choice would remain undetected until a collapse, this is a simple development of the the paradoxical blue pill-red pill selection. Whats lies between the red pill and blue pill is not a simple choice and living with its consequences, on the contrary, the real problem is, whats left out also potentially eliminates the correct solution.
This split emerging from left out alternative, goes back into preferences which had moved it to other conditions present in the selected option, when both options appeared functional, the analysis of choice includes in itself choices which would be available from the point of making a selection, shaping choice as position. The preference shaped by being risk averse and making defensive decisions existing within the process of choice, as such one observes the effect precedes the cause, and as such the cause is not need but merely a movement towards a predictable effect, it becomes an outcome of a preceding effect. This is where, and I claim, the argument of failed companies, that causes can only be viewed from a vantage point in future, becomes a contradiction. If we take case of some known corporate failures, for example, Nokia’s Management was divided internally on direction (effect), and the choices did not match needs of the customers (cause), which ultimately reflected in drop in sales (effect); similarly Blockbuster ignored customer’s preference; Kodak, Yahoo…… In case of Nokia, we see that customer need had evolved from the time when Nokia enjoyed its success. At that time I remember from my own experience of cellular phones, customer need had already moved away from basic telephony towards entertainment and photography. If I can use another over-simplistic analogy here to illustrate this phenomena with our thirst subject, we all agree that while the context is important in terms of our subject being in comfort of his house in a modern city, or in Saharan desert, the first glass of water is more satisfying than the second. When Apple came into the market with its iPhone in 2007, it directed its focus on this preference, element of entertainment, by adding it with basic communication features (need); following the principle of diminishing utility this preference has now become need, and competition has moved on different preferences.
There is more to failing companies than bad luck, it is taking bad risks. Risk taking is important for progress, selection of which risks to take starts from developing choices from the need. In this respect Prospect Theory provides a ground which can be systematically applied in selecting risks and which lead to choices , by taking risks which increase our chances of success, and not minimize chances of losses. Managing this balance is the essence of risk management.