Contents

Introduction

1 Overview

Making decisions

Risky situations

Real life: London congestion charging: a big decision

Upsides and downsides

Why manage risk?

About this book

2 Types of risk

Operational risks

Strategic risks

Real life: Confronting strategic risk at IBM

Financial risks

Real life: Failing to manage strategic risk at ITV Digital

Project risks

Dependencies and knock-on effects

3 Understanding risk

Probability

Subjective probabilities

Impact

Real life: Warren Buffett's Midas touch

Subjectivity and impacts

Decision trees

Expected value

Fatal downsides

Life decisions

A business decision

Break-even analysis

Risk profiles

Probability/impact matrix

The information trade-off

Means, not ends

4 Responding to risks

The alternatives

Eliminating risks

Tolerating risks

Minimising risks

Diversifying risks

Concentrating risks

Hedging risks

Transferring risks

Insuring risks

Getting it right

5 Risk psychology

The personal perspective

Personal values

Corporate values

Frames

Prospect theory

Risk aversion

The problem with information

Confirmation bias

Anchors

Over-reacting to bad news

Real life: The risk psychology of a rogue trader

Affection for the status quo

The endowment effect

Bigness bias

Mental accounting

Overconfidence

Illusions of control

Escalation of commitment

Faulty hindsight

Sunk costs

Overcompensation (risk homeostasis)

Restoring the balance

6 When things go wrong

Human errors

No blame

Towards better decision making

Lessons for decision making

Collective learning

The smart organisation

Moving forward

Contacts