August 1, 2020 / VOLUME NO. 116
Living With Ambiguity

Managing risk has always been an inherent aspect of banking. But the coronavirus has made risk management personal.

The pandemic’s uncertain duration is an extraordinary test in individuals’ ability to manage their own risk. Institutions and individuals alike are debating how to proceed in this heightened risk environment, with only imperfect and incomplete information to guide their decisions.

It’s been “a fascinating risk experiment” for Allison Schrager, an economist and co-founder of LifeCycle Finance Partners, to observe. Schrager focuses on how individuals move resources over time; her book, An Economist Walks Into a Brothel, uses the experience of unusual groups or occupations to explain five principles for dealing with risk.

“I’m really a risk specialist,” she says. “From Day One, I was more comfortable than most people because I’m personally comfortable with ambiguity and think about risk all the time.”

The pandemic has sharpened everyone’s sense of personal risk management, and not everyone has approached it with Schrager’s analytical fascination. Individuals must now strike a balance between potential exposure to Covid-19 if they engage in certain activities against the payoff. It has also shown them the risk they pose to others, who may have a different approach to personal risk management or different set of variables.

It’s exhausting.

“I’m willing to manage risks and live my life,” she says. “But I don’t want to be irresponsible and infect random people in the grocery store, and I certainly don’t want to infect my parents. It’s a complicated risk problem.”

Schrager rejects the idea that people are “terrible at taking risks” or can’t comprehend ambiguity, but there’s a caveat. “We present risks in ways that make no sense to people, and then blame them for not making sensible decisions.”

To be actionable, risk needs data and useful context. Infection information that includes frequency tends to be more meaningful than raw statistics, Schrager says. Context about the distribution of cases will be more useful than stories about idiosyncratic “tail cases” that fall on either end of the bell curve.

“Risk management is about accepting what you do and don’t know, managing it by understanding their trade-offs and landing somewhere in the middle,” she says. “It’s finding ways to make risk meaningful to you. We’ve always lived with risk. I think people are just more aware of it now.”

Kiah Lau Haslett / managing editor of Bank Director
/ ideas, insights and perspectives on
Two banks share how their branch strategies have been affected by the Covid-19 pandemic.

“The reality is, we’re not face-to-face and having that critical contact with our clients on such a regular basis … I’ve got to think about what we’re doing in these other channels so we’re at the top of the consideration when our client has their next financial need.” — Carmen McClennon, Bank OZK

Emily McCormick  / vice president of research for Bank Director
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