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The Upside of Downside Risk

Posted By Administration, 30 June 2014

I’m not particularly pedantic about how English is used. Languages evolve continually - as long as meaning is clear I don’t mind how the language gets adapted. So when people start verbing a noun (to party, to author, to privilege, to google, to blog) I don’t flinch at all.  Or when my kids speak about ‘versing’ each other (from ‘versus’). Or even when infinitives are split or sentences ended with prepositions -  as long as the meaning is clear I am unfazed.

But one thing I feel should be avoided is trying to flip the meaning of a noun through 180 degrees by adding an adjective. And this brings me to the topic of this article - why on earth do we use the term ‘upside risk’, or its cousin ‘positive risk’?

Risk is risk.  The Oxford dictionary defines it simply: “the possibility that something unpleasant or unwelcome will happen”. Linguistically speaking, you cannot use an adjective to invert the meaning of a word. A ‘positive liability’ is still a liability; ‘downwardly satisfied’ still means satisfied.

Yet people try.  I’ve heard phrases like ‘negative dilution’. If you don’t mean dilution, then surely you mean concentration.  So why not just say so?

Coming back to ‘upside risk’, all this really means is opportunity. And this is the word we should use.

There are two primary reasons I do not like the phrase ‘upside risk’. Firstly it is confusing; and secondly it casts a negative shadow on something that should be positive.

About the confusion: by using a single word, risk, to mean two opposite things, based on a modifier, the adjective, we are still grouping those two different things together. The noun, the named word, is the same: risk and upside risk are still classed as risk. So our brains have to juggle the concept that in one way they are the same thing but simultaneously they are different. Additional confusion comes through our approach to these opposite types of risk. We all know that risks should be controlled. But what does it mean to control a positive risk? Our approach to opportunities is different to our approach to risks, and by conflating the two we lose not only meaning, but focus as well.

Shakespeare’s Juliet asked ‘What’s in a name?’ Well, quite a lot, actually.  Just like people whose surname is King or Champion are statistically more likely to be successful than people named Poor or Maggot, so our initial perceptions are clouded by the terms we use to describe something. Calling someone a vulture is very different from calling them an eagle. In a similar way, risk is essentially a negative concept. By viewing opportunities as a kind of risk, we do not focus on them as opportunities.

What I am advocating, and I know I am not alone in this view, is that, in the context of Enterprise Risk Management, we disentangle the word ‘risk’ from the multiple usages of the word. We should call an ‘upside risk’ an opportunity. Within opportunities there are possibilities that something unpleasant or unwelcome will happen: these are the risks we should manage.

There is a much wider debate that this opens up: to what extent should risk managers be responsible for opportunity management? My belief is that we should be focussing on an ever tighter integration between governance and risk.  Strategic objectives as a whole need to be set, evaluated and monitored, and the risks incumbent in them carefully managed; and risk managers are well positioned to assume a wider responsibility in this regard. But that is a topic for another day.

For now, let’s be as clear as possible on what we are talking about.  The phrase ‘upside risk’ is like some kind of inverted Orwellian doublespeak: putting a negative gloss on a positive concept. Let’s put an end to it. There is too much downside in ‘upside risk’.

 

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Michel H. Sauzier says...
Posted 01 July 2014
A risk is the possibility of a surprisingly bad, or surprisingly good, specified future event. Risk has three dimensions: 1. Direction; 2. Degree of probability; 3. Magnitude of the consequences.
First, the direction of a risk is either positive (a surprising gain) or negative (a surprising loss). A risk also has a degree of probability, a degree of likelihood. The third dimension of any risk is the magnitude of its consequences. The three dimensions of a risk are independent: a positive or a negative risk may be either highly probable or very unlikely, and the extent of its consequences may be very small or very large. For the risks with which risk management typically deals, the direction is negative, the probability is slight, but the consequences may be disastrous.
Risk management is the process of planning, organizing, directing, and controlling resources to achieve given objectives when surprisingly good or bad events are possible.
Hope this helps in understanding risk and opportunity!
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