Risk Communication Best Practices

Lee Beachy © 2009

Ruminations on
Risk and Reality

A brief discussion about the

challenges of discussing risk.
Lee Beachy
Laconia Savings Bank
beachy@laconiasavings.com
www.linkedin.com/in/lelandbeachy
1

It must be a matter of perspective!

1
 Risk Communication Best Practices
Lee Beachy © 2009

But! Calculated Risk = Profit

Risk & Profit Fuel Capitalism…

2
 Risk Communication Best Practices
Lee Beachy © 2009

My Perverse History: Risk Voyeurism

• Forensics can be fascinating!
• My well-worn copy of the Warren
Commission Report (1960s)
• Three-Mile Island (1970s)
• NASA disasters (1987; 2003)
– Challenger
– Colombia

• 9/11 Commission / Twin Towers

• NTSB Accident Research
http://www.ntsb.gov/Publictn/publictn.htm

A Few Basic Premises:

• We can learn from past mistakes

• We can avoid ‘bad things’ with better

communication

• Sloppy communications do have

consequences

• Hard to grasp realities can however still be

communicated

3
 Risk Communication Best Practices
Lee Beachy © 2009

The Risk Landscape of Banking

If you Alliterate, You Must Need a Logo

• Effectiveness

• Efficiency

• Excellence

• Ethics

4
 Risk Communication Best Practices
Lee Beachy © 2009

Effectiveness
• How do we communicate risk?
– Theoretical, probable, conceptual, causal
– The little known or the unknown (but possible)
– The unwelcome

• How do we arrive at ‘actual’ risk?

– What we can know
– What we can (but don’t yet) know
– What we can not possibly know

• Snapshots, trends, critical factors,

escalators, and summaries…

Risk Perceptions
• Factors that change risk perception:
– Dread
– Degree of Control
– Anthropogenic / Natural
– Choice
– Children
– Novelty
– Awareness
– Personal Applicability
– Benefit Tradeoff
– Trust

10

5
 Risk Communication Best Practices
Lee Beachy © 2009

But Wait! There are still more…

• Cultural differences
• Gender
• Inter-generational
• Language
• Past experience
• Anecdotes
• Media preferences
• Etc.
• Etc.

11

Risk Classification Schemes

• The Old Standby:
– High, Medium, Low
• Eye of the beholder [usually subjective]
• No ability to quantify or calculate [nominal]

• Ordinal, Interval and Ratio Schema

– Ordinal: Ranking (but still non-metric)
• More granular than ‘HML’
– Interval: Numbers have relative meaning
– Ratio: Numbers have absolute meaning

• Develop a means of consistency!

• Hard data is good to find!
12

6
 Risk Communication Best Practices
Lee Beachy © 2009

Elucidating Risk
• How do we measure risk?
– “The risk analysis process is primarily based on
professional judgment.” — Macrae

– Nonetheless, we have certain obligations:

• Make judgments as explicit as possible
• Keep ratings / rankings within a framework
• Force assessments to the point of knowledge
• Review / audit for collaborative perspective

– Subjectivity can be tempered by use of rating

keys containing ‘clear’ definitions of value

13

Risk Language & Communications

• Why are language and taxonomy

important?
– Reduce inconsistencies
– Reduce subjectivity
– Support ERM objectives:
• Risk awareness
• Risk accountability
• Risk action-ability
– To really manage risk we must be able to
articulate, “what is our risk tolerance?”
but most organizations do not have the metrics
or the language to speak clearly to that question.

7
 Risk Communication Best Practices
Lee Beachy © 2009

The Dilemma of Uncertainty

• Known (K)
– This risk can be identified, enumerated and
quantified
• Unknown (u)
– This risk may be identified and enumerated but
can not meaningfully quantified
• Unknowable (U)
– The existence of this risk or set of risks is not
predictable ex ante, let alone quantifiable

16

8
Risk Communication Best Practices
Lee Beachy © 2009

17

18

9
 Risk Communication Best Practices
Lee Beachy © 2009

What are the lessons?

• Non-financial risk has more uncertainty
• Our communication should not imply more
certitude than actually exists
• We have some challenges!
– A primarily financial audience may need careful
guidance to understand non-financial risks
– Make sure that risk assessment comes out of the
best possible source
– Find ways to reinforce the informed expertise of
subject matter experts (SME)
– Communicate the reality of population
uncertainties! “Confidence levels”

19

The Confidence Interval…

.025 .025
95%
.4750 .4750

µ X

Z
-1.96 0 1.96

20

10
 Risk Communication Best Practices
Lee Beachy © 2009

Efficiency
• [Risk] “communication should begin by
identifying the information most relevant to
the decisions that people face, finding out
what they currently know, and filling in the
missing pieces.”
– Baruch Fischhoff ; Carnegie Mellon

• “Risk messages are difficult to formulate in

ways that are accurate, clear and not
misleading.”
– National Academy of Sciences

21

Realistic Expectations
• “Many people, especially decision makers, seem
to think that well-crafted messages or
communication campaigns can eliminate or
reduce conflicts in risk issues. These individuals
believe that the conflicts are based on lack of
information, that if all the parties were made
aware of the facts, they would agree. This
overlooks the possibility that conflicts are based
on factors such as distribution of risks and
benefits, different values, and different goals.”

– Meaning of Data?
– Acceptable Levels of Risk?
– Applicability to specific domains?

22

11
 Risk Communication Best Practices
Lee Beachy © 2009

The Classic Communications Model

“Yes, Its Complicated!”

23

What Kind of Conversation is this?

• Initiative Conversations
– …get things started by proposing a new goal or a
new future.
– An active and intentional approach to the future!
• Understanding Conversations
– …support input from, and discussion, the people
who will work together toward the goal.
• Performance Conversations
– …are based on requests and agreements — ask
and promise — to get specific about who will do
what, and by when!
• Closure Conversations
– …focus on recognizing accomplishment and
people — and cleaning up unfinished business.
24

12
 Risk Communication Best Practices
Lee Beachy © 2009

25

Excellence
• A Framework for Risk Communication
– Consistency
– Clarity

• Graphics, Diagrams & Representations

– Appeal to Dr. Tufte!
– Few in number, fantastic in content

• Appeal to Action or Decision

• “Let my dataset change your mindset.”

26

13
 Risk Communication Best Practices
Lee Beachy © 2009

Relationship Matrix

Severity
Catastrophic Critical Marginal Negligible

Frequency 
Stop and fix Stop and fix
Frequent immediately immediately
Correct ASAP Correct soon

Stop and fix Correct

Probable immediately
Correct ASAP Correct soon
sometime

Correct Correct
Occasional Correct ASAP Correct soon
sometime sometime

Correct Correct Correct

Remote Correct soon
sometime sometime sometime

Routine Routine Routine Routine

Improbable maintenance maintenance maintenance maintenance

27

An Example: {Ordinal-Interval}

28

14
 Risk Communication Best Practices
Lee Beachy © 2009

29

Priority-Driven Communication

Access
• Print & • Senior Mgmt
narrative • Board
• Report by
• CSV of tool Variable Committees
output
• Follow-up
Responses
Vendor Exec
Report Data Synopsis

Data Distillation
30

15
 Risk Communication Best Practices
Lee Beachy © 2009

31 Distinct Findings
637 Separate Instances
93 Management Actions & Dates
1 Page = ‘Priceless’

31

Paying Attention to Small Details!

• Cascading Sequences can Devastate!
– Blockage in polisher (water filter)
– Moisture leak into air system
– Two valves trip
cold water flow stops
– Backup valves are not open (had been shut)
– Backup valve indicator covered by repair tag
– Special relief valve (second backup) sticks open
– Special relief valve gauge also not working

• What are we describing?

Three Mile Island — near meltdown!

32

16
 Risk Communication Best Practices
Lee Beachy © 2009

Watch Your Language!

• The Effects of Language ‘Mitigation’
– Command
– Obligation Statement

Spectrum
– Suggestion
– Query
– Preference
– Hint
Source: Ute Fischer & Judith Orasanu
See also Outliers, Malcolm Gladwell; Chapter 7

• The challenge is in communicating either

danger or risk upward in a hierarchy
– Both personality and culture influence exchange
– Reference: Geert Hofstede’s Dimensions

33

Ethics
• Poor contextual landscapes
– What do they need to know first?

• Statistical slants
– Primary message of the data? Resist the partial
truth of misrepresentative data selections!
– Misleading scalar graphics
– Data distributions represented?

• Risk Comparisons
– Can these risks be compared in a single
dimension?

• Other bias situations?

34

17
 Risk Communication Best Practices
Lee Beachy © 2009

Risk Management or Controls?

• Control Flavors
– Preventative
– Detective
– Corrective

Inherent Risks Controls Residual Risk

Holistic Risk Management / Dialog

• Encompass entire risk continuum

– Changing risks
– Changing risk tolerances
– Avoid ‘control myopia’

Inherent Risks Controls Residual Risk

18
 Risk Communication Best Practices
Lee Beachy © 2009

About Statistics
• Don’t just take statistics as you find them
• Use metrics with solid credibility
• Favor whole numbers and simple fractions
• Employ graphics and charts to present and
clarify — not to confuse or distract
• Strive for comprehensibility and clarity
– But don’t over simplify
• Pay attention to other estimates and
understand variances

37

About Comparisons
• First Rank
– Chronological comparisons (same risk)
– Comparisons with a standard
– Comparisons with different estimates

• Second Rank
– Compare acting versus not acting
– Compare alternate recommended solutions
– Compare similar risk in other environments

• Third Rank
– Compare peak versus average risk
– Compare risks with benefits
– Compare multiple causalities
38

19
 Risk Communication Best Practices
Lee Beachy © 2009

Helpful Links:
• Harvard Center for Risk Analysis -
http://www.hcra.harvard.edu/index.html

• [CMU] Center for Risk Perception and Communication -

http://sds.hss.cmu.edu/risk/Home.htm

• [LSE] Centre for Analysis of Risk and Regulation -

http://www.lse.ac.uk/collections/CARR/

• Society for Risk Analysis - http://sra.org/

• International Risk Management Institute -

http://www.irmi.com/

• Information Presentation: http://www.edwardtufte.com/

• FAIR Risk Metrics:

http://fairwiki.riskmanagementinsight.com/

39

Sources / References:
– Kuritzkes & Schuermann; “What We Know, Don’t Know and
Can’t Know about Bank Risk: A View from the Trenches”
Wharton Financial Institutions Center;
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=887730

– Integrated Risk Management Framework; Treasury Board of

Canada Secretariat; http://www.tbs-sct.gc.ca/pol/doc-
eng.aspx?id=12254

– Improving Risk Communications; Committee on Risk

Perception and Communication, National Research Council;
www.nap.edu/catalog/1189.html

– Ford & Ford; The Four Conversations, © 2009 Berrett-

Koehler Publishers; ISBN 978-1-57675-920

40

20
 Risk Communication Best Practices
Lee Beachy © 2009

Familiar?
At which client did the CEO get this photo?
Or is this ‘intrinsically embedded’ marketing risk?

41

Questions / Discussion

21