As humans, we love to predict the future. From the weekend weather to next weeks lottery numbers, we are always making predictions.
According to psychologists, humans have a natural tendency to predict the future because it helps us to better understand and navigate the unknown and complex world around us. Done well, predictions can help us deal with uncertainty. Done poorly, it is false assurance and can be dangerous.
In business, there are lots of predictions. The sales plan, the budgeting process and the business plan all rely on assumptions and predictions. Predictions are not limited to business. A range of professions — from fortune tellers to gamblers, from sociologists to economic forecasters, from meteorologists to religious leaders — have long devoted time and energy to predicting future events.
At the beginning of every new year, many organisations and risk professionals make predictions about risks, likely events, possible outcomes and impacts. Here are some examples from hundreds of 2023 risk prediction reports:
- Executive Perspectives on Top Risks for 2023 & 2032
- Eight business continuity and operational resilience risks to watch in 2023
- Top 10 Cybersecurity Predictions For 2023
- Allianz Risk Barometer 2023
As we begin the new year, lets take a look at how risk and governance professionals can use these annual prediction reports to work for them. Specifically, how to use these reports to better manage risks.
Predictions in risk management
Risk management involves making many predictions. Predictions are important as they allow organisations to anticipate and prepare for potential threats. They can help identify trends and patterns that may indicate a heightened risk.
In risk management, once a risk has been identified, predictions are typically made using a combination of statistical analysis and expert judgment.
- Statistical techniques such as probability distributions and historical data analysis can be used to identify potential risks and estimate their likelihood of occurring.
- Expert judgment, such as input from industry experts or subject matter specialists, can also be used to identify potential risks and assess their potential impact.
Both statistical techniques and judgement rely on historical data, experience and assumptions to help determine or predict the level of risk.
Limitations of risk predictions
Whilst making predictions can have benefits in business and in risk management, there are many inherent limitations to be aware of. Here are some:
- Lack of accurate data – Predictions are often based on data that may be incomplete, inaccurate or outdated. Garbage in – garbage out. This can lead to inaccurate or unreliable predictions.
- Unforeseen events – Predictions may not take into account unexpected events or changes in circumstances, which can render them inaccurate or irrelevant.
- Probabilistic nature- Predictions are often based on probability rather than certainty. This can lead to a wide range of possible outcomes.
- Limited perspective – Predictions may be based on a limited perspective or a narrow set of data. This can lead to a bias or a lack of understanding of the bigger picture.
- Complex systems – Some systems, such as weather, economy, or politics, are inherently complex and difficult to predict with a high degree of accuracy.
- Human and many other bias – Predictions may be influenced by personal or political views, which can lead to inaccurate or misleading results.
- Overconfidence – Predictions can lead to overconfidence in the accuracy of the predictions. This can lead to false assurance and poor decision making.
- Lack of actionability- Predictions may not be actionable, meaning that it may not be possible to take direct actions to mitigate the predicted risks.
- Time horizon – Predictions can be affected by how far into the future the predictions are made. The more distant the predictions, the more uncertainty and variables are involved.
- Lack of context – Predictions may not take into account all the relevant context, and may not be transferable to other situations or environments.
With that in mind, be cautious when making predictions. Sometimes, the process you go through to identify, analyse and treat the risks is more important than the outcome.
Are the annual risk prediction reports valuable?
Despite these limitations, predictions about risks and likely events can still be valuable in risk management.
These annual risk prediction reports are largely based on surveys from different geographic locations, industries and professions. Surveys themselves have inherent limitations, including bias. But collectively, the annual risk prediction reports can be a good ‘risk radar’. They then go through some analysis and quality assurance by the authors before finalising the report.
To use annual risk predictions, an organisation should review annual predictions from many sources and assess their potential impact on their organisation.
Annual risk predictions can be used to:
- Identify potential risks and hazards that a company or organization may face in the coming year. This can include financial risks, operational risks, and external risks such as natural disasters or changes in regulations.
- Inform the strategic planning process by providing insight into potential risks that may impact the organization’s ability to achieve its goals.
- Improve allocation of resources to mitigate potential risks. This may include increasing the budget for risk management, or allocating additional staff to manage specific risks.
- Better inform monitoring and oversight activities. For example, if a specific risk is identified, the organization may increase monitoring in that area.
- Review and updating risk management plan based on the predictions helps to ensure that it remains relevant and effective. This can include adjusting policies and procedures as needed, and incorporating new risks as they are identified.
Additionally, being able to predict and manage risks proactively can give organisations a competitive advantage in their industry.
Take aways
By identifying and mitigating risks early on, organisations can potentially save money and resources dealing with the consequences of a risk event.
It’s important to use predictions as a guide, rather than a definitive answer. Consider other sources of information and multiple scenarios in risk management.
Predictions are an important tool in risk management, and annual risk predictions are a good ‘risk radar’. Understand their limitations. Use them in conjunction with other sources of information to better manage risks and make more informed decisions.
Can We Help?
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- Providing an interim Chief Risk Officer to backfill a vacancy.
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- Helping organisations take their first steps towards implementing a formal risk management framework.
- Performing an independent review of your existing risk management framework to identify gaps and level of maturity.
- Conducting risk workshops covering strategic, operational and project risks.
- Conducting risk culture assessments.
- Supporting you across a range of risk management services including business continuity, crisis management, cyber risk, climate change risk, third party risk and fraud risk.
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