Two approaches to managing risk: reducing likelihood and reducing impact

What does it mean to manage risk?

It means a lot of things. 

If you're exposed to a potential hazard, there are a number of things you can do to minimise or eliminate its impact on you. You can take steps to avoid it. You can take steps to make it less likely. You can take steps so that its effect is mitigated. In some cases you can transfer the risk, for example, through insurance. Sometimes, the best thing to do is nothing. 

Two of the more important approaches that I've listed above are:

  1. reducing the likelihood of an undesirable event from happening; and
  2. reducing the impact of an undesirable impact if it happens.

Some examples are in order.

Health - preventing heart disease and stroke and responding to it are very different but also important

Heart disease and stroke are two of the leading causes of death we face. We can take steps to reduce the likelihood of suffering from heart disease and stroke, by following the feet, forks, and fingers lifestyle prescription. Which is to say, making sure we get sufficient physical activity, that we eat well, and we don't smoke.

But let's face it. No matter what you do, you can suffer a heart attack or a stroke. And if you do, it pays to get medical attention. FAST. Doing so could save your life. Or prevent irreversible harm. Being mindful of the symptoms can be vital.

Heart attacks, for example. In the words of David Ropeik and George Gray in Risk: A Practical Guide for Deciding What's Really Safe and What's Really Dangerous in the World Around You:

A heart attack is not an instant event, but a dynamic process that usually evolves over 4 to 6 hours. In fact, about half of heart attack victims have warning symptoms hours, days, or even weeks in advance.

Symptoms can include:

  • "recurrent chest pain brought on by exertion and relived by rest";
  • "Uncomfortable pressure, fullness, squeezing, or pain in the centre of the chest, usually lasting 15 minutes or more";
  • "Pain or tingling that spreads to the shoulders, neck, or arms."
  • "Anxiety; nervousness; cold, sweaty skin; lightheadedness; fainting; nausea; or shortness of breath";
  • "A knot in the stomach that feels like indigestion"; 
  • "Paleness or pallor"; and
  • "Increased or irregular heart rate".

Needless to say, if you think you're suffering a heart attack, or know something who is presenting with these symptoms, you should get medical attention right away.

And strokes? Remember the acronym FAST. If you, or someone you know, experiences

  • Facial drooping,
  • Arm weakness, and
  • Speech difficulties, then
  • TIME is of the essence. Call emergency services or get to the hospital right away.

Terrorist acts and natural disasters - government-level planning should address prevention and response

Another example relates to government-level planning relating to terrorist acts and natural disasters. You can't really stop natural disasters. And you can take steps to make terrorism more likely, but unfortunately such events are inevitable in a free society.

(You might be able to make terrorism impossible if you lived in a totalitarian society, but I'm prepared to trade-off the benefits of living in a society where I am largely free to think, act, and say what I want, for the small amount of risk involved.)

An important part of managing risks associated with hazards like terrorist acts and natural disasters is response preparation. Having capabilities to respond in relation to small- and large-scale events of this nature is essential to reducing the wider impact of these events.

Climate change - you know where I'm going...

Steps should be taken to reduce human-driven, dramatic changes to our environment. But let's face it: to an extent, the horse has bolted. So we need to learn how to adapt and live with it.

In other words, we need to look at the "How to stop it" part of the equation. But we also need to look at "How to live with it". 

The examples I've called upon differ substantially. But they illustrate the importance of taking complementing approaches to managing the risks to which we are exposed, to reduce the likelihood and mitigate their impact.

Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.