Why Stakeholders and Key Managers Avoid Risk, Especially When Risk Assessment Results Conflict with Their Personal Interests and Achievements

Introduction:

Risk is an inherent part of decision-making in any business or organization. Whether launching a new product, entering a new market, or making critical financial investments, risk is something that every leader, from stakeholders and decision-makers to business owners and key managers, must consider. However, a major challenge arises when the results of risk assessments conflict with the personal interests, professional achievements, or the established goals of these individuals. In such cases, many leaders and decision-makers may choose to avoid risk rather than confront it.

In this article, we will explore why key decision-makers and stakeholders often avoid taking risks, particularly when they face a clash between risk assessment results and their own personal interests. We will delve into the psychological, professional, and organizational factors that drive this avoidance, as well as the implications for business strategy, growth, and long-term success. Additionally, we will highlight the significance of frameworks like ISO/IEC/IEEE 16085:2021 in guiding organizations in implementing effective risk management processes and discuss why having a Chief Risk Officer (CRO) is critical for addressing these challenges.

1. Understanding Risk Assessment in Decision-Making

Risk assessment is a vital component of decision-making, especially in systems and software engineering. According to ISO/IEC/IEEE 16085:2021—which outlines life cycle processes for systems and software engineering, including risk management—risk management is a structured process that identifies, evaluates, and mitigates risks to ensure the success of a project or operation. Risk assessment provides organizations with the data they need to understand potential threats and weigh the benefits of risk mitigation.

However, risk assessment is not always an objective process. It is influenced by the biases, experiences, and perspectives of the individuals involved. When the results of a risk assessment indicate a significant risk, especially one that could negatively impact a manager's reputation, financial compensation, or professional achievements, it becomes easier for them to dismiss or avoid confronting the findings. The tension between the results of the assessment and personal or organizational goals can lead to resistance or avoidance, a common challenge when it comes to implementing risk management strategies.

2. Personal Interests and the Fear of Loss

The fear of loss is one of the most fundamental psychological reasons for avoiding risk. This concept is central to prospect theory, which posits that individuals fear losses more than they value equivalent gains. This psychological bias means that stakeholders, business owners, and key managers are more likely to avoid risks that could negatively impact their personal or professional standing.

For example, consider a scenario where a decision-maker is presented with a risk assessment showing that a new business initiative could lead to substantial financial losses. If that initiative’s failure could jeopardize their career, bonuses, or reputation within the company, the decision-maker may become resistant to acknowledging or acting on the risks involved. The fear of personal loss outweighs the potential for future gains, which can lead them to avoid confronting the risk altogether.

This behavior is not just a matter of personal psychology; it is directly tied to the power dynamics within an organization. Managers and stakeholders who are primarily focused on personal achievements are often reluctant to make decisions that could harm their reputation or reduce their personal rewards, even if these decisions would benefit the organization in the long term.

3. Cognitive Biases in Decision-Making

Human cognitive biases play a significant role in risk avoidance, particularly when decision-makers are confronted with uncomfortable or inconvenient truths. Some of the most common cognitive biases include:

• Confirmation Bias: Decision-makers may selectively interpret or seek information that supports their pre-existing beliefs or desires. If a risk assessment contradicts their objectives or desired outcome, they may choose to ignore or downplay the findings.
• Anchoring Bias: Leaders may anchor their decisions to past experiences, believing that what worked previously will always work. This can result in them underestimating new risks or failing to account for significant changes in the external environment that could affect the success of their decisions.
• Overconfidence Bias: Some decision-makers may overestimate their ability to manage or mitigate risks. This overconfidence can lead to ignoring or undervaluing the results of risk assessments, particularly when those results suggest significant risks that could challenge the status quo.

4. Corporate Culture and Organizational Goals

In many organizations, especially those with a strong focus on short-term performance, there is often a resistance to taking risks. This is particularly true when meeting deadlines, financial goals, and personal targets becomes the primary focus. Many key decision-makers prioritize maintaining a consistent flow of results rather than addressing potential risks that might cause delays or failure.

• Short-Term Focus vs. Long-Term Vision: When organizations or managers focus too heavily on short-term objectives, such as hitting quarterly targets, risk assessments that suggest long-term potential losses can be dismissed. Business owners and stakeholders often overlook or undervalue long-term risks in favor of meeting immediate financial goals, which can be seen as more directly tied to their personal interests.
• Fear of Accountability: Accountability for decisions is another major factor that influences risk avoidance. In hierarchical organizations where the blame for failure is often placed squarely on the shoulders of key decision-makers, there is a heightened fear of negative outcomes. If a risk assessment points to a potential issue, the individual responsible may hesitate to acknowledge it, as doing so could expose them to criticism or loss of position.

5. The Aversion to Risk in Product Management: Ignoring Vulnerabilities

One clear example of risk avoidance in action can be seen in the world of product management. Product managers are often under intense pressure to meet deadlines and deliver results. When risk assessments highlight vulnerabilities in a product or system, the immediate reaction from some managers might be to reject or downplay the findings rather than confront them head-on.

For instance, a product manager might resist addressing security vulnerabilities or flaws in a product design because doing so would delay the release date, which is tied to their professional success. The manager might argue that the issues are “minor” and not worth the time or resources needed to fix them, even when risk assessments indicate that they could cause major security breaches or reputational damage later on. This tendency to prioritize personal success or organizational timelines over addressing risks demonstrates the core issue at play: the conflict between short-term goals and long-term sustainability.

6. The Software Engineering Example: Risk Assessment as an Afterthought

Another common scenario occurs within software engineering. In many cases, risk assessments are not considered until after a product has already been developed or even launched. Engineers, under pressure to deliver on time, may sideline risk assessment as an afterthought, often neglecting important areas such as system security, scalability, or regulatory compliance.

A software engineering manager may feel that taking time to evaluate these risks would slow down the development process, resulting in missed deadlines or a delayed product launch. When faced with the risk of failure to meet business objectives, the manager may decide to ignore or delay addressing critical vulnerabilities. This approach prioritizes personal and organizational goals over potential long-term risks, which can ultimately lead to security breaches, legal challenges, or system failures.

7. Avoiding Accountability: The Fear of Negative Outcomes

In both the product management and software engineering examples, the core reason for risk avoidance is the fear of negative outcomes. Managers may avoid confronting risk assessments because acknowledging these risks could expose them to accountability for potential failures. The desire to avoid personal or professional embarrassment can lead to a situation where the risks are ignored or pushed aside until it is too late.

At the organizational level, this fear of failure can foster a culture where risk is consistently avoided, and uncomfortable truths are left unaddressed. In such an environment, stakeholders and key managers may prioritize their personal achievements and professional success over the long-term sustainability of the organization.

8. The Need for a Chief Risk Officer (CRO)

This is where the role of a Chief Risk Officer (CRO) becomes indispensable. The CRO is tasked with overseeing the organization’s risk management framework, ensuring that risks are properly identified, assessed, and mitigated, regardless of personal interests. By implementing a structured approach to risk management, such as those outlined in ISO/IEC/IEEE 16085:2021, the CRO can help bridge the gap between personal motivations and organizational priorities.

The CRO provides the necessary oversight to ensure that risks are managed effectively and transparently, helping to align individual and organizational objectives. A dedicated CRO can create a culture of risk awareness, where the avoidance of risk is no longer a default response to challenges, but instead, a strategic consideration based on data, risk assessments, and long-term organizational goals.

Conclusion

The avoidance of risk, especially when it conflicts with personal interests and achievements, is a common behavior among stakeholders, business owners, and key managers. It is driven by cognitive biases, fear of loss, and the pressure to meet short-term goals. However, this behavior can be mitigated through the establishment of strong risk management frameworks, such as those outlined in ISO/IEC/IEEE 16085:2021, and the inclusion of a Chief Risk Officer (CRO) in the leadership team.

A CRO can ensure that risk management is approached holistically, integrating both organizational goals and the personal interests of decision-makers. By doing so, organizations can ensure that they address both short-term needs and long-term sustainability, allowing for growth and innovation without jeopardizing the company’s future stability.