Fundamentals of Risk Management

Defining the upside of risk 
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At its most simplistic, and specifically in relation to hazard risks, the upside of risk 
is that there is less downside. However, that is not a very compelling reason for senior 
managers to support a risk management initiative. Perhaps the most easy to explain 
and the most compelling thought is that the upside of risk is the ability to pursue a 
business opportunity that competitors would be unwilling to embrace. It would also 
be part of the explanation to say that competitors would be too risk-averse to take 
such a high-risk opportunity.
With so much talk about the upside of risk, it has become a problem for risk 
management practitioners. The range of analyses from less downside to formalized 
opportunity management is wide and lacks focus. The board of an organization is 
not going to be persuaded by such a wide-ranging and ill-defined set of concepts and 
approaches. Clearly, the discipline of risk management needs to get a better under-
standing of the upside of risk and sell the message to the board.
Perhaps there is also scope for the risk management standards to take a more 
coherent approach to the upside of risk. An approach employed in some risk manage-
ment standards is that the 4Ts should be extended to include the fifth T of ‘take the 
risk’ and become the 5Ts. Very often, the established standards fail to recognize that the 
organization will be taking the opportunity and the intended rewards, rather than 
deliberately taking the risk for its own sake.
The story in the box below is an example of an individual who saw an oppor-
tunity and embraced that opportunity. He did not seek, embrace or take the risk, 
except insofar as it was embedded in taking the opportunity. It is the case that indi-
viduals who are seen as risk takers are, in fact, individuals who are willing to pursue 
opportunities that others may consider too risky. Their behaviour is about embracing 
the opportunity, not necessarily enjoying taking the associated risks.
Consider the case of the vendor in Wall Street, New York City, who set up a stand and sold
donuts and coffee to passers-by as they went in and out of their office buildings. During the 
breakfast and lunch hours, he always had long lines of customers waiting. He noticed that 
the time wait discouraged many customers who left and went elsewhere. He also noticed 
that, as he was a one-man show, the biggest bottleneck preventing him from selling more
donuts and coffee was the disproportionate amount of time it took to make change for his 
customers.
Finally, he put a small basket on the side of his stand filled with dollar bills and coins, 
trusting his customers to make their own change. You might think that customers would 
accidentally count wrong or intentionally take extra quarters from the basket, but what he 
found was the opposite – most customers responded by being completely honest, often 
leaving him with larger-than-normal tips. Also, he was able to move customers through
at twice the pace because he didn’t have to make change. In addition, he found that his 
customers liked being trusted and kept coming back. By extending trust in this way, he was 
able to double his revenues without adding any new cost.
Honesty box and the upside of risk

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