How to Deal with Risk Tolerance and Risk Aversion

Blog

 

Martin Pergler shares an article that explores risk appetite and how to address it as we move into phase two of COVID-19. 

Act I of COVID response has been about broad societal measures to stop the pandemic from overwhelming the health system, e.g. physical distancing, pausing the economy, cutting travel; all to slow exponential spread. While Act I isn’t over, it’s increasingly clear a long Act II, balancing reopening and personal freedoms with stubbornly continuing COVID risk, will follow. That’s before Act III, a full-fledged recovery (vaccine? antibody tests? herd immunity?…), can truly start.

For Act II, we need to start having clearer, more nuanced, and non-judgmental discussions about risk appetite. This is a concept from (institutional) risk management, specifying* how much of what type of risk an entity is prepared to take, and under what circumstances, including for what benefit. One of the challenges in risk management is reaching consensus on risk appetite, and reflecting that different individuals and groups in the entity may have different risk appetites. This risk appetite concept is also applicable to individual and societal risk-taking, though less often discussed explicitly. In any case, it’s going to be very important for COVID Act II, and we’re already seeing it rear its head, in ugly, unstructured, politicized fashion.

 

Key points covered include:

  • Objectively different personal risk
  • Different personal risk tolerance
  • Lack of rationality
  • Selfishness vs altruism

 

Read the full article, Getting serious on COVID risk appetite, on LinkedIn.