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Submitted by Rajeev Gopal on
We are often so taken up by the issue of risk management that we do not stop to think about the need for taking risk. The need for risk management should arise only when risk exists and where it is possible to manage the risk. Risk exists either because of natural phenomena or due to human action. Leaving the natural phenomena aside, let us focus on risk created by human action. Take financial management or investing. Or for that matter driving on a road. The level of risk is determined largely by the attitude of the investor/ driver. Would the risk not be low if the driver is careful and avoids a rash driving style. Similarly would the risk not be low if the investor targets a moderate level of return - sticks to growth linked returns and avoids exotic, synthetic and speculative instruments with the sole objective of 'beating' the market and earning more than what can be legitimately expected. If the majority of investors were to adopt a 'reasonable return' approach, would the incidence of financial crises not be lower. However, instead of promoting a low risk approach we encourage risk taking by trying to come up with risk management strategies. If any risk management strategy had any ability to reduce risk there would not have been multiple crises in this world - either developing or developed. But most of us cannot avoid the attraction of studying and preaching on risk management. Whereby a simple mantra of 'live within your means' would suffice, we tend to develop all kinds of mathematical jargon around risk management with the hope of reducing risk. Indeed one of my disappointment with risk management is the lack of use of simple language. To me risk management is largely common sense. I believe there is no such thing as risk reduction or risk management. If you indulge in risky behavior, sooner or later the hand of chance would deal you a fatal blow. My belief is taking risk where it is not needed is foolish. e.g. driving or investing rashly. Risk management vs risk avoidance. I believe the focus should be risk avoidance. A majority of situations should be handled by risk avoidance and only a small fraction should need risk management. Let me also clarify that taking risk in exploring new territory is not foolish - e.g. exploring for new lands or going to the moon. Or creating a safer explosive. Or creating gadgets to reduce drudgery. These are legitimate ventures. Man is curious by nature and will indulge his curiosities. By risk avoidance I do not mean curbing your curiosity. Instead I would avoid risk driven by greed or carelessness, e.g. investing in junk bonds. There is no need for junk bonds to exist and by extension there should be no need for people to invest in junk bonds. This is risky behavior which cannot be mitigated. Indeed there cannot be risk mitigation for greed. Only avoiding the risky behavior can help. Coming to risk management for development. I am not sure what the risk in development is. Is it whether your development project will fail due to (i) natural phenomena - e.g. lack of rain, (ii) political action, e,g, an arab spring, or a coup, (iii) poor project design or implementation, e.g. lack of stakeholder buy-in. The first two are beyond anybody's control and the only risk mitigation available is to go step by step and diversify. The last one reflects a poor effort by the project developers and should not happen at all. But maybe they do. We are not perfect and there are numerous instances of poor project development and implementation. So perhaps risk management for development means how to plan and execute projects properly. How to get stakeholder buy in. How to allocate adequate resources for a smooth implementation. How to retain flexibility in project scope, funding and staffing. How to have responsive and proximate management structures which can respond quickly. I look forward to the 2014 WDR to understand this better. I also hope it focuses on specific projects, situations etc and less on generalities.