Martin Volken's Hazard Evaluator
THE Martin Volken “HAZARD EVALUATOR scale”andThe Interplay between Consequence and Likelihood!During the presentation at the WURTS financial Risk management conference.High consequence decision-making is difficult. If time pressures are added to the process, life can become stressful very fast.I am a mountain guide and guiding service owner and take a lot responsibility over other peoples’ lives. My particular profession involves risk to live and limb. The decision-making process lacks the comforting redundancies of a more procedural risk management process. Considering that there is always a residual risk in high consequence decision-making, the long-range odds are not stacked favorably for a professional mountain guide. I also had to come to terms with the fact that the average human does not process information optimally in a high stress situation.The most tangible differentiator in my versus other profession’s risk management schemes is that they often happen on a seemingly intuitive level, since the environment and general nature of the job do not lend themselves to procedural decision making. The situations often lack redundant safety measures. The time and place when procedural decision making fails and you have to make a lonely judgment call. This is when the following scale becomes interesting.But before we talk about the “Hazard Evaluator Scale”, let me touch on the emotional side of decision-making. The lateral emotional driver. For the most part people think that they do what they do for all the right reasons. You become a firefighter because you want to save people, or in my case a mountain guide, because you want to work in a healthy, beautiful environment that stands far above the latest trends. The problem is that our world is filled with ambition and competition that tends to lead us away from our original “position statements”. In the mountain climbing world our motivation can sneakily change to "conquering a peak” and “established a line”. The yearning for recognition and financial success is in part inherent to our human nature and key to our survival. There is nothing wrong with that – until these drivers start taking over and influence our decision making process. Ah yes, the ego. It is as old as humanity; it has enabled us to scale huge mountains and conquer new continents, but on a general level it tends to dull our sense of connectedness with whatever it is we do. There is a difference in risk management between being goal oriented and becoming emotionally invested in a desired outcome. Regrettably this switch happens most of the time without our conscious knowledge and that is why I dubbed it “the lateral emotional driver”. In my world the risk management decisions should be based on the rhythm of the landscape and the people we are with. Everything else will decrease safety in mountain travel. I consider this a metaphor for all risk management decisions.A memorable moment in the presence of Ex Secretary of Defense Mr. Robert Gates, who certainly has done some risk assessment in his life. The decision making process in standard mountain terrain can be dubious – just like in any other profession that involves high consequence decision making (i.e. the financial world or law enforcement or fire fighting) – especially when you come to the lonely stretch where procedures fail. Suddenly an initially simple situation can turn into a stress-full ordeal where uncertainty is your companion and the potential ramifications can be very serious. As indicated before; cerebral processing power, high stress, time pressure and high consequence decisions are a strange mix and very often the outcome is a blind decision, meaning you end up making a decision because:a) You have to due to time pressures, even though you are not ready to.
b) Your emotional desires have started overriding the facts.How can one boil down complex decisions and not make terrible mistakes? The trick is not to oversimplify complicated matters, but to base your decisions on a simple decision making framework that helps you: a) properly identify the hazard andb) identify the contributing elements of the particular hazard. Any decision making in a potentially high hazard field can feel complicated and overwhelming very quickly, but with some training the following decision making matrix can easily become the “independent and unbiased agency” that cuts through the static noise of your conflicting emotions.All hazard evaluations are based on the relationship between “Likelihood and Consequence factors” that contribute to the overall magnitude of a Hazard.
The elements of consequence and likelihood are always linked in the hazard evaluation process and if you fail to recognize this, you are running on faith.All of us have played this game many times in real life, like making a major financial investment, starting a new business, handing in a report with a deadline to your boss later that you should or in my case heading out into the fog on a crevassed glacier. As basic as this relationship seems it has helped me tremendously in organizing my hazard evaluation and therefore decision-making process. Here is how it goes.The figure above is simple – so simple that you should have a mental picture of it when the time comes. This is key. Complicated decision making charts and time sensitive hazard evaluation don’t mix well. Here are the guidelines that will help you use this chart:
- What is the likelihood that this hazard will play out?
- What will the consequence be if the hazard plays out?
The trick in hazard evaluation and management is to keep the relationship between Likelihood and Consequence intact. The glaring red flag starts flying high if you applied this scale, the defined Hazard value presents an unacceptable risk and you have run out of cards to bring the cumulative number back down. The likelihood or the consequence of a defined Hazard playing out can often (not always) get influenced by personal skill, equipment etc.
- Start out by identifying the actual hazard. Very often there is an intuitive sense that something is off, but we have not developed the skill of crystallizing what the hazard actually is. If you are doing this in a team, make sure to let everyone articulate their opinion. Right now you are not rating the severity of the hazard, you are simply identifying it.
- Now go the consequence side and assign what an absolutely intolerable consequence would be. This can range of course, but identify the worst possible and intolerable outcome and assign the number 5 to it. (In my world the worst possible outcome would very often be a fatality, but in the business world it could mean the end of a company, catastrophic lay-offs etc. An unacceptable consequence could also be that you damage your or your company’s image).
- Now go down the consequence scale and downgrade the consequence severity from 5 all the way to one. Again, in my world it could go from a fatality (5) to a severe injury (4) to a light injury (3) to inconveniencing my client (2) and not incurring any real consequence at all (1). Notice that I do not assign the number 0. I consider the distance between 0 and 1 the stretch that represents the “unavoidable residual risk”.
- The Likelihood side features the same scale ranging from 5 to 0. If you were to assign a 5 on the likelihood side you would be very certain that this Hazard would play out, a 4 would give you a good amount of certainty, a 3 would represent some certainty, a 2 a remote possibility and a 1 would represent essentially that the Hazard would not play out. Again the stretch between 0 and 1 represents the residual chance that something can always happen.
- If the consequence indicator is at the very top (5) of the scale, the likelihood indicator would have to be at the bottom range (1) end of the scale or visa versa for the risk to still be considered manageable.
- You assign your number on each side by developing the skill of cataloging the contributing elements of the defined hazard to the consequence or likelihood side. Once this is done, you will have most likely a calmer sense and easier time in assigning a number to each side.
- Now you simply add the two numbers up and if the sum total of both the indicators starts to approach or even exceeds the number 6, you are presented with a very high Hazard. If you decide to carry on anyway, you are making the nebulous transition to running on faith instead of having faith in your conscious decision making process – at the very least it will tell you something about your risk tolerance or the risk profile of your management team.
- Please keep in mind that the interpretation of this scale can and will be different for many people in the same situation, but Hazards tends to increase exponentially. If you go through the process and still have doubts about the severity of the Hazard, multiply the C and L numbers. The max allowed value is still 6. This might help you with two things: a) as mentioned it will illustrate the exponential nature of increasing hazard and b) it will show clearly that severe Hazard does not need to have one of the indicators all the way at the top. (i.e 5 on one side and 1 on the other side multiplied will produce a Hazard value of 5, but 4 on one side and 2 on the other side will produce a Hazard value of 8!) This addition to the Hazard Evaluator scale was suggested by Dr. Charlie Ellis A moment of conversation with Dr. Charlie Ellis
An expert level skier with superb equipment stands on top of a frozen 40 degree slope that doglegs above a big cliff. It does not mean the same thing as if this slope has to be tackled by an intermediate skier with low end equipment. In this case the consequence would be the same for both parties, but the likelihood might not. If the superb skier feels absolutely confident that he or she can ski the slope, it might be an acceptable decision to simply ski it. Let’s say Likelihood 1 and Consequence 5. For the intermediate skier, skiing this slope might mean Likelihood 3 and Consequence 5. It would therefore present an unacceptable Hazard. As you can see neither one the skiers has much influence over the consequence in this case. If they fall and go over the cliff, they are both going to die. It just happens to be that the intermediate skier is a very smart person who is aware of his or her limitations. He or she brought some crampons and an ice axe. She stops skiing (changes the game), puts on crampons and climbs down the slope. With an easy measure she greatly reduced the Likelihood of a fall (1) and brought the relationship between C and L back into balance.
- Here is an example from the mountain world on how to influence the likelihood of a hazard playing out:
One of the cardinal rules of young business entrepreneurs is this one: “Never spend your own money!” Why is this rule so widely accepted? It is pretty simple. The entrepreneur has a relatively small amount of control over the outcome of his venture, meaning the likelihood that his or her idea might not be successful. So by finding investors they distance themselves financially from the ramifications of a failed business venture. The consequences are back down to a tolerable level and the relationship between the two sides is intact. In summary:
- Here is a brief example from the financial world on how to influence the consequence of a hazard playing out.
Happy decision-making! Martin Volken is available for seminars and presentations on Risk Management ranging from 2 to 8 hours. Please contact him directly at email@example.com for further information.
- Define the hazard
- Go through the process of cataloging the contributing elements to the Consequence or Likelihood side of the equation
- Assign the values and let the numbers fall into place.
- Let the Hazard Evaluator become your independent risk management agency in your head.