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Judgment and risk

September 15, 2021

An ability to manage risk is essential to good judgment and there are many examples of successful organisations led by those with great judgment underpinned by their abilities in managing risk.  Similarly, failures to assess risks are at the heart of many of the errors of judgment that are prominent in most corporate disasters, not to mention the “errors of judgment” cited by public figures as they are forced to resign.  

So what is the relationship between risk and judgment?  In my work on the analysis of judgment risk is integral to almost all stages of the judgment process, defined as the combination of personal qualities with relevant knowledge and experience to form opinions and make decisions.  Risk awareness is especially important in understanding the personal biases that are involved in choices, as a key element in the process of choice itself and in the assessment of feasibility of delivering decisions as a result of the choice.  It also features in the preliminaries to a choice in assessing the trust that can be placed in people and information and how far past experience will be relevant to the current choice.  

Good risk management is also one of the reasons why judgment has to be measured as a process rather than by the outcome (other reasons include the role of luck and the absence of counterfactuals).  If the outcome is not as desired – say, on the reliability of new suppliers or the creditworthiness of new customers – it may be that this has been part of an accepted risk strategy.  

But while it is necessary, risk management is not sufficient for good judgment.  Other qualities and skills as well as relevant experience will be required, depending on the context. Professionals require a different blend of qualities and experience to commercial firms, bureaucracies a different blend to fintech startups.  

But for good judgment, risk management is not an optional extra.  It’s no surprise, therefore, that I am suggesting to those who want to improve their judgment that one way to do so is to develop awareness of their own risk tolerance/appetite and their risk management skills.

The relationship between judgment and risk is crucial.  Since good judgment is highly prized, I suggest that risk professionals should be capitalising on the connection in promoting their specialism.

Sir Andrew Likierman is Professor of Management Practice at the London Business School and its former Dean.  For the full framework, including the role of risk, see his article “The elements of good judgment; How to improve your decision making” (Harvard Business Review, January/February 2020).

Tags: Sir Andrew Likierman
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