Describing, Evaluating, and Managing Risk
Describing, Evaluating, and Managing Risk
The goal of describing, evaluating, and managing risk is improving choices, not identifying perfect choices. Even when the evidence available to the decision maker is good and he or she makes a good decision, bad outcomes can result. More often, though, medical and management decisions are made with inadequate information. Good management, however, can reduce risk and reduce the consequences of risk.
Describing Potential Outcome
The first step in any decision is to describe what could happen, including the probabilities and value of possible outcomes, and to calculate descriptive statistics about them.
The description begins with an assessment of the probabilities of the possible outcomes. Ideally, these probabilities should be objective based on evidence about the frequencies of deferent outcomes. In practice, decision makers predominantly use subjective probabilities.
Unfortunately, these subjective probabilities are often inaccurate, even when made by highly trained clinicians or experienced managers.
Evaluating Outcome
The next step is to evaluate possible outcomes. Calculating descriptive statistics is the final step in the process of evaluating outcomes. The most common statistic is the expected value.
To calculate an expected value, multiply the value of each outcome by its probability of occurrence and then add the resulting products. Good decisions usually require more information than just an expected value because typically the expected value is not the outcome that occurs. Most decision makers find that a list of the best and worst outcomes are available. A list of the most likely outcomes can also be useful.
Risk References
Risk references may influence choices. A risk-seeking person prefers more variability.
Likewise, a patient who can expect to live 18 months if he undergoes standard therapy may be a risk seeker. A risk neutral person does not care about variability and will always choose the outcome with the highest expected value. A risk-averse person avoids variability and will sometimes choose strategies with smaller expected values to avoid risk.
Managing Risk
There are two strategies for managing risk: risk sharing and diversification. Buying an insurance policy is the obvious way to share risk. Joint ventures and options are common in the biotechnology and pharmaceutical fields. Diversification consists of identifying a portfolio of projects or therapies that are not highly positively correlated. Joint ventures also can make diversification less risky. Some risks can be hedged via diversification. A balanced portfolio of projects and lines of business can be profitable in any market environment.
Reducing variation in costs (so that risks are lower in capitated environments) or reducing fixed costs (so that sales slumps have fewer negative effects) can cut risk sharply.
Risk Communication
Authoritative texts in the field of risk management all highlight the importance of risk related communication.
We indeed feel that when an organization commits to serious risk management, it is essential that there be shared knowledge and a consensus on:
The risks that are tolerated, but they still may well occur and require action in the future.
The risks whose reduction has been decided, allowing time for related projects to be started and to complete the risks that are high and theoretically inadmissible that must be tolerated because of no avoidance nor reduction solution.
This shared knowledge relies entirely on appropriate communication methods.
Regardless of communication tools, it is obvious that communicating about risk situations serves a purpose and is conducive to responsible behavior. In contrast, communicating about threats and vulnerabilities will be harder to manage and may not be supported by the staff.
