I am a big fan of The Big Bang Theory. For those of you familiar with Sheldon, Leonard, Raj, Howard and Penny, you will already have an idea of where I am going with Schrödinger’s Cat. Schrödinger’s cat has been referenced throughout the show as a mechanism to explain several situations within the plucky band of nerds. For those of you not acquainted with the show, please have patience as I weave my way through risk management (of which I know a good deal), thought experiments (of which I know little) and quantum mechanics (of which I know even less).
Erwin Schrödinger, an Austrian physicist, posed his “Cat thought experiment” in 1935 to articulate a theory in quantum mechanics on how something could be in two states at once. His thought experiment was, in a nutshell, if you place a cat in a box with poison, from the world outside the box the cat can be considered both DEAD and ALIVE. The experiment illustrated that until the box is opened and the cat is observed, the most accurate answer to “What is the state of the cat?” is the cat is both alive AND dead. A fairly morbid proposition but it became a benchmark illustration of how atomic particles can be considered in multiple states at the same time given equal probabilistic outcomes until definitively observed. (I apologize for all of the cat lovers out there. I didn’t pick a cat for this experiment; Herr Schrödinger did. I will be asking for forgiveness from my own two cats, Ninja and Ilsa, when I get home. And it was a THOUGHT experiment. No cats were harmed in the making of this blog.)
Now, what does this have to do with Risk? It is obvious if you are the cat, but what about the rest of us?
Businesses are in two states all the time; every business situation has elements of both Risk and Reward. When you think of risk, most often the conversation immediately drives toward the negative conversation. Take the classic “crossing the street” risk. We always start with the Risk is that you get hit by the car. The Likelihood of that risk is dependent on how busy the street is, how fast you walk, did you look both ways before crossing, etc. The Impact is…well – painful… But we many times forget about that other side of the coin. The Reward is you cross the street safely and have the Opportunity to ask the chicken why he crossed the road. (insert groan at the bad joke here)
Too many times risk managers focus on the negative attributes of risk. What happens if X goes wrong? What is the likelihood? What is the impact? However, most risks have a negative AND positive state. Every risk has some opportunity associated with it. Technology innovations, new business models, cloud computing, extended enterprises and third parties – each of these has a Risk and each has a Reward.
This is where Schrödinger’s cat comes into play. It is only when more information is gathered around the situation that the risk comes into focus. If you look at the poor cat in the box, the more information we have; the better chance we have of understanding if the cat is dead OR alive. We can change the probability of the outcome based on facts. Does the poison have a smell that repels the cat? Is the poison tasteless? Is the poison inserted into a nice piece of juicy salmon? All of those pieces of information give us better insight into the state of the cat.
Organizations are facing instances of Schrödinger’s cat every day. The ability to determine the state of risk is dependent on how many facts can be compiled about the business, the risks and the opportunities and how well those pieces of information can be put together. When an organization innovates, breaks new ground, launches a new service, opens a new market or embarks on a new journey, the opportunity has both RISK and REWARD. Moving forward, the organization needs to balance those two states. However, most organizations have a natural tension between what they WANT to do to get the reward and what they HAVE to do to manage risk. Mastering this friction is the basis for Risk Intelligence.
I am pleased to announce the publication of the white paper “Risk Intelligence: Harnessing Risk, Exploiting Opportunity” at the RSA Archer Summit. This paper explores how organizations need to change the conversation from the negative risk landscape to the positive opportunity landscape. We are moving to a world where risk management will become the primary source of competitive advantage. Rather than avoiding risk, organizations need the ability to embrace risk. Risk management will become the core capability which separates winners from losers. Organizations that understand and manage risk effectively will prosper while those that can’t will fail. Today’s business environment is not a Thought Experiment. No organization wants a fatality on their hands – even if it is an imaginary cat.