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Harvard Business Review

How to manage the risks you can’t foresee in business

Harvard Business Review
13 minute Read

Well-run companies prepare for the risks they face. Those risks can be significant, and while they’re not always addressed successfully — think Deepwater Horizon, rogue securities traders, and explosions at chemical plants — the risk management function of a company generally helps it develop protocols and processes to anticipate, assess, and mitigate them.

Yet even a world-class risk management system can’t prepare a company for everything. Some risks are so remote that no individual manager or group of managers could ever imagine them. And even when firms envision a far-off risk, it may seem so improbable that they’re unwilling to invest in the capabilities and resources to cope with it. Such distant threats, which we call novel risks, can’t be managed by using a standard playbook.

In this article we’ll explore the defining characteristics of these risks, explain how to detect whether they’ve materialised, and then describe how to mobilise resources and capabilities to lessen their impact.

What makes risks novel

Unlike the more-familiar and routine risks a company faces, novel risks are difficult to quantify in terms of likelihood or impact. They arise in one of three situations:

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