Risk intelligence

Abstract: Risk Intelligence: Learning to Manage What We Don't Know, by David Apgar, 2006, Cambridge, MA: Harvard Business School Press. Pp. ix + 210. ISBN: 978-1-59139954-4 In Risk Intelligence: Learning to Manage What We Don't Know (2006), David Apgar develops a framework of risk management best practices for nonfinancial firms, based on his experience as a financial firm risk manager. Throughout the book, Apgar translates and applies financial risk management methods to general business risk management. Based on his research findings, Apgar asserts that by separating financial from nonfinancial risk management techniques, business managers will improve their decision-making processes, as well as the end results of their respective decisions in a world of growing risk and uncertainty. Throughout Risk Intelligence, Apgar presents his arguments in a readable fashion toward the general business risk management audience, although others will certainly benefit from the ideas presented. Stories, examples, risk management theory, and bestpractice methodologies provide readers with an examination and critique of current risk management methods and provide steps for action to correct the flaws that currently exist in the methodology that is presently being employed in the world of business. In each chapter of the book, Apgar first presents a research question or problem, followed by an answer or solution as it relates to risk management methods for nonfinancial risk managers. The author clearly defines the terms and definitions presented in each chapter, gives examples to support his argument, and offers a solution that is both practical and theoretically sound. The logical manner in which the information is presented contributes to a greater understanding of the arguments presented and aids in the overall readability of the book. In the first chapter, "Changing Your Approach to Risk," Apgar relates the story of a businessman who seemed to be randomly affected by both the start and the conclusion of the U.S. Civil War in order to illustrate the seemingly unpredictable and uncontrollable nature of risk. According to the author, even though risk may appear to be unpredictable and uncontrollable, it is in fact manageable. Apgar defines risk as "the possibility of a loss or reversal - or gain or advance - different from what we expect from a decision or an activity" (p. 11). But, equally as important as Apgar's definition of risk is his assertion that managers should be concerned with risks that affect them and their firms the most. Based on this framework, the author then enumerates what he defines as the "four rules of risk and the myths that each of these rules explode" (p. 13) in the subsequent chapters of the book. In "Separating Learnable Risks From Random Ones in Business Decisions," Apgar refutes the myth that "all risks are random" with his first rule, which states: "recognize which risks are learnable" (p. 14). In this chapter, the author draws the key distinction between nonrandom, learnable risks, which can be managed through increased knowledge and information, and random risks, which are stochastic in nature (p. 26). To illustrate this point, Apgar uses the example of the early 2001 jumbo jet development competition between Boeing and Airbus to demonstrate the concept of the economics of learnable risks. In this episode, Boeing ended up canceling a 3-year development plan because Boeing senior management was unable to estimate the ability of Airbus to design jumbo jets and because it doubted its own ability to understand the competitive market forces at work in the this lucrative market. While Boeing struggled, Airbus proceeded to win contracts from major Asian airlines at least partly due to the fact that Airbus management seemed to understand how to assess market risks, how to address the evolving needs of potential customers, and then how to proceed accordingly. In the end, the loss of this competition and its economic cost caused Boeing CEO Phil Condit to step down from his leadership position. …