Kaplan at Bocconi: Risk without Measurement

"Measurement refers to the past, whereas risk refers to something which might happen in the future (or not). It's problematic to reconcile two concepts that are so antithetical." Many, in Bocconi's Aula Magna, were surprised to hear Robert Kaplan, the father of the balanced scorecard, giving up on measurement in his approach to risk management.

Kaplan spoke in a faculty seminar organized by SDA Bocconi School of Management open to Bocconi students, which was part of the workshop "Innovating Management & Accounting Practices" organized by Ariela Caglio, Angelo Ditillo, and Andrea Dossi in collaboration with the University of Sienna. The Harvard Business School professor said that while quantitative indicators can be applicable in the case of risks of governance and compliance, they are hard to work with in cases of operational and strategic risks, on the one hand, and business risks (due to unforeseen macro events like natural catastrophes or deep crises), on the other.

In the latter cases, the problem is that quantitative approach is based on probability theory and so extrapolates from past regularities, while unique events are completely unexpected because by definition they haven't already occurred in the past. Problem is that singularities happen more often than it is usually admitted.

In risk management, the quantitative approach can be substituted by appropriate techniques that are useful in identifying risk and calling for alert or intervention, without constructing a specific indicator. Scenario analyses, war games and heat maps are some of the techniques suggested by Kaplan in this regard.