Risk Management Myopia

In many different experiments,

research has found that people exhibit loss aversion by

avoiding short-term expenditures, even though they

could actually result in significant long-term gains. More

specifically, people often miss an opportunity to mitigate

risks by not acting with a long-term perspective and by

not taking interdependencies into accoun

 

In this year's Global Risks report, the World Economic Forum provided many interesting insights about emerging risks across the globe.  In addition, the report provided research into how risks are managed in various organizations.  One particular study examined the common myopic view of risks and the resulting behavior.  Here is what the report concluded.

In many different experiments, research has found that people exhibit loss aversion by avoiding short-term expenditures, even though they could actually result in significant long-term gains. More specifically, people often miss an opportunity to mitigate risks by not acting with a long-term perspective and by not taking interdependencies into account.

Individuals and corporations have short time horizons when planning for the future so they may not fully weigh the long-term benefits of investing today in loss reduction measures that could benefit them in the future. The upfront costs of mitigation loom disproportionately large relative to the delayed expected benefits over time. Applied to businesses, short-term horizons can translate into a NIMTOF perspective (Not in My Term of Office).

Current performance metrics and compensation systems are driving this myopic approach to the detriment of companies' long term viability and the economy at large.  Looks like it is time for some vision correction in risk management.