Risk Management Warning Flag 2 – Normalcy Bias

“It can’t happen here…”

Sinclair Lewis (1885 – 1951)
American Novelist and Playwright
Winner of the Nobel Prize in Literature (1930)

…but what if it could?

Failing to adequately prepare for adverse events places an organization at significant risk. Indeed, such shortcomings have contributed to the fall of nations, demise of companies, and severe injury and death of countless people. Yet despite all of the evidence, many organizations today remain unprepared to deal with catastrophic events.[wcm_restrict plans=”49034, 25542, 25653″]

While it is impossible, if not impractical, to prepare for every eventuality, leaders sometimes ignore seemingly obvious risks. These individuals often suffer from a normalcy bias, a belief that because an adverse vent has not occurred or affected them, that the event will not occur. This bias leads to the underestimation of both the probability and impact of an event resulting in a lack of preparation for the event.

Leaders afflicted by a normalcy bias may leave their organizations extremely vulnerable to catastrophic events. Furthermore, this denial may hinder event response if the situation arises. While not all inclusive, the four lists below, Process-Based Warning Flags, Process Execution Warning Flags – Behaviors, Potential, Observable Results, and Potential Causes, are designed to help executives and managers recognize misalignments between their organization’s risk level and oversight coverage. Only after a problem is recognized and its causes identified can the needed action be taken to move the organization toward improved performance.

Process-Based Warning Flags

• Lack of or immature risk management program
• Long risk assessment / reassessment interval
• Lack of assessment follow-up procedures for identified risks / issues
• Lack of directives, policies, and procedures driving contingency planning particularly for high-risk decisions and infrequently performed tests and evolutions
• Lack of or immature operating experience program
• Lack of or minimal insurance coverage

Process Execution Warning Flags – Behaviors

• Inadequate Board of Directors and Senior Leadership Team oversight
• Emotions-based dismissal of risk evidence
• Discounting of external events and operating experience
• Dismissal of the need to perform contingency planning
• Non-compliance with written procedures

Potential, Observable Results

• Personnel injury and death
• Severe asset damage
• Catastrophic environmental harm

Note: These observable results often occur as lower impact events that increase in both number and severity over time until a catastrophic event occurs. For more information, see the Accident Pyramid within the StrategyDriven point of view document, Preventing Catastrophic Industrial Accidents.

Potential Causes

• Misunderstanding of risk management principles and practices
• Logic errors in risk analysis
• Leadership bias towards / focus on internal experience
• Inwardly focused organization culture
• Excessively high risk tolerance

Final Thought…

A normalcy bias can be hard to recognize. Two intelligent people (or groups) can reasonably reach different risk conclusions based on the same data. Thus, what would be a Black Swan¹ event for one person may not be to another. For this reason, StrategyDriven recommends organizations prepare to flexibly and scalably respond to catastrophic events.

1. Black Swan events are unpredictable, catastrophic, and retrospectively believed to have been fully predictable. This definition is derived from Nassim Nicholas Taleb’s book, The Black Swan.[/wcm_restrict][wcm_nonmember plans=”49034, 25542, 25653″]

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About the Author

Nathan Ives is a StrategyDriven Principal and Host of the StrategyDriven Podcast. For over twenty years, he has served as trusted advisor to executives and managers at dozens of Fortune 500 and smaller companies in the areas of management effectiveness, organizational development, and process improvement. To read Nathan’s complete biography, click here.