How to Manage Risk (After Risk Management Has Failed) Harvard Case Solution & Analysis

In the last decade, and particularly over the past few years, several the most broadly revered businesses of the world have collapsed. The authors consider that a leading, though not often mentioned, factor was these businesses' conventional method of risk management, which has a tendency to search for risk in all the wrong places. Two essentially different perspectives have evolved over time on how risk should be evaluated. The prevailing and first view -- termed the frequentist perspective -- is based entirely on insistent historical data, like weather patterns. The second, or Bayesian, perspective considers risk to be in part a property of the observation process, or a judgment of the observer; repetitive historic data therefore are essentially complemented by other types of information.

This information plays a dominant role, with the integration of judgment making a considerable improvement over the conventional strategy, where there is a good deal of important data. Where there's little if any useful data, judgment plays a dominant role, supplying worth under conditions beyond the range of the conventional tactic. Either way, understanding the important, sometimes essential, role of judgment can lead to realistic and more practical behaviour -- in large part because we realize that judgment is not perfect and can be refined as more experience is acquired. The essential point is that danger under the Bayesian technique can be measured quantitatively, whatever the amount and worth of the information. And rather than spotlight completely on the observed world, Bayesian risk evaluation also represents the uniformity, reliability and precision of the onlooker.

PUBLICATION DATE: October 01, 2010 PRODUCT #: SMR364-PDF-ENG

This is just an excerpt. This case is about STRATEGY & EXECUTION

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