Risk

What We Talk About When We Talk About Risk

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As the Covid-19 pandemic causes the realignment of industries, behaviours and social structures, we are all living and working with an elevated sense of risk. This is not only health-related risk, but risk to job security, organizational health, and future growth. The uncertainty wrought by the pandemic has tilted everything – not least the sports industry – on its axis.

In an environment shaped by unpredictability and questions without clear answers, it can be difficult for organizations to properly evaluate risk and differentiate between opportunity and threat. Without previous experience of a crisis of this nature, finding useful waypoints or historical comparisons to help with its navigation can be extremely difficult. 

Acceptable v Unacceptable Risk

In the absence of data and experience from comparable circumstances, we have to be prepared to evaluate our approach to risk and reward. But how best to do that?

In February 2018, Tim Ferriss conducted an interview with Ray Dalio, founder of the investment firm Bridgewater Associates, for The Tim Ferriss Show. As one of the most successful investors in modern history, Dalio is well placed to comment on the pros and cons of different attitudes to risk.

For Dalio, there are essentially two types of risk: acceptable and unacceptable. Unacceptable risk is existential risk, while acceptable risk involves taking decisions where the outcome may be unclear, but the worst-case scenario will simply be the ability to learn and grow from a mistake.

“I think the most important thing is that there’s the risk of ruin,” Dalio told Ferriss. “The risk of being knocked out of the game. The risk of the unacceptable. Then there’s the risk of the painful mistake. There’s a world of difference (between them).”

If we are able to identify the existential risks that the pandemic may pose to our organizations, then we can use a scenario planning process to plot a course away from those specific challenges. In principle, that will then leave room to continue to take calculated risks that are unlikely to cause lasting damage if they go wrong, and may have significant benefits if they pay off.

“Distinguish between being risk-averse and being risk-prone in terms of being able to have the experiences that help with learning,” Dalio explained. “Risky experiences can produce some of the pains that allow for learning, but don’t get knocked out of the game. I think of risk in terms of how to do that. How do I improve my return-to-risk ratio?”

The Opportunity

The effects of the pandemic have created major social, economic and humanitarian challenges. As a result, we are all – as individuals and as organizations – dealing with a set of risks and threats now that were barely on the radar as recently as the turn of the year.

However, we shouldn’t allow the uncertainty and risk of the situation to blind us to new opportunities. The effects of the pandemic have quickly exposed systemic inefficiencies and inequalities, events that are leading to transformational change in many areas.

The same is true of sports. In an environment without fans and a number of previously reliable income streams, organizations are having to be nimble to simultaneously contain damage and exploit new, experimental avenues for growth. 

But how do we know which risks are safe to take? The key is first mapping out the scenarios that may pose a serious threat to the viability of the organization. Once that work is done, we will have created a safety net that affords us more freedom to explore the opportunities presented by an industry navigating change on an unprecedented scale.

Image: Sean Benesh/Unsplash

Interested in reading more from the Sportsology research team? Our latest paper, The Ethical and Performance Imperatives of Diversity for Front Offices, is available to download for free.