Thursday, January 10, 2013

Risk and the Jakarta Moped

A few weeks ago, I was sitting in a taxi in rush hour Jakarta, when a motor scooter brushed past us, weaving through the almost-stationary traffic.
The rider appeared to be a young mother carrying two passengers: one a small boy, about three years old, standing on the scooter’s platform directly between her and the handlebar, wearing only shorts and a torn T-shirt; the other a baby perched on the woman’s lap, nestled in the crook of her left arm, wearing nothing but a disposable nappy. By contrast, their mother wore a safety helmet the size of a giant pumpkin.
As I’m sure most parents' response would be, my initial reaction was horror at how vulnerable her children were.
Then I thought about an article in the June 2012 Harvard Business Review – Managing Risks: A New Framework, by Robert Kaplan and Anette Mikes, in which the authors propose that we should look at our risks in three distinct categories:
  • First the Preventable Risks – these are controllable and we should try to eliminate or avoid them. In a company, these risks would include things like internal fraud, health and safety hazards, and others that we can do something about. In that mother’s case, she appeared to be riding carefully and she had her children as well shielded as she could (given the real limitations of a moped with three passengers).
  • Second the Strategy Risks – these we accept voluntarily in order to achieve our strategy. These are things like a bank taking credit risk by lending to its customers. If we want or expect a high return, we usually have to accept that the trade-off is a higher level of risk. The young mother obviously needed to get somewhere with her children, and she’d opted for this means of transport – I assume after some, probably unconscious, benefit/risk assessment of the alternatives.
  • The third category of risk is the External Risks – these are events such as natural disasters and major political or economic changes, where we have no control over the likelihood of the event occurring. We can only mitigate its impact. She of course faced the risk, probably daily, of Jakarta’s chaotic traffic. I’m always surprised at how 4 million vehicles in one city can play ‘dodgems’ all day, with so few hitting one another, but most people seem to get to their destinations – eventually.

Thinking about this case, she’d mitigated the risk as best she could, while there was inevitably some residual risk. This is exactly how we operate in business – we’re not in the business of eliminating risk, but of understanding its various components and managing the bits we can. In her case, if the worst happened and they were hit, it would be more important for her to be in a condition to look after the children, than the other way around.
So maybe she had it about right. I doubt whether she’d read that article, but it was useful to think through its practical application. I hope that mother and her family continue to enjoy safe travels.

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