Tuesday, February 2, 2021

The Principle of Calculated Risk

"In carrying out the task assigned .... you will be governed by the principle of calculated risk ... which you shall interpret as avoidance of [risk] exposure ... without good prospect ... as a result of such exposure ...  of greater [benefit]" (*)

Admiral Chester Nimitz
to his subordinate admirals,
Battle of Midway, June, 1942

"You will be governed by the principle of calculated risk"
What does that really mean?
"Calculated risk" is a bit defensive; such a calculation is typically designed to protect a scarce or endangered asset or outcome. To that end, there are these constituents:

  • First, a risk assessment based upon a cost vs benefit analysis and calculation
  • Second, the calculation is mostly dependent on a knowledge base, assumptions of knowledge accuracy and timeliness, and a heads-up that there may be knowledge gaps.
  • Next, doctrine, ideology, or rules-of-thumb are made subordinate to the calculation
  • If there is an adversary or nemesis, game-theory may be useful to estimate reactions (walk a mile in their shoes, etc .... )
  • And last, if there is no scarcity which requires the protection of a risk calculation, then the principle is unnecessary, though still useful nonetheless. 

Fair enough

What happens when it comes to actually facing the risk in a real project situation?

  • Cool heads will be needed; emotion will be left at the door, hopefully
  • Random effects will almost certainly intervene and perturb the knowledge-base calculations
  • Updates to game theory assumptions we be needed along the way.
  • And, revisits to the knowledge base to update the risk calculation (the calculation may be rather dynamic in the doing ...) will be needed.

Plan B:

In spite of cool calculations, in the heat of the moment managers may blunder through the guardrails. Then what?

There should be a framework for Plan B on the shelf. Facts at the time will fill in the framework.

Ah, but who's in charge of Plan B? 

Someone should always be hanging back to grasp the strategic picture while tacticians deal with the here-and-now. And, that someone should have supreme executive authority to step in and make corrections.


(*) A Naval War College essay dissecting the Nimitz principle of calculated risk is found here.


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