Objective Risk vs. Subjective Risk: How They Shape Your Organization's Risk Program

Understanding both is key to building a resilient risk management strategy.

In the fast-paced world of business, risk is something we can’t ignore. Whether it’s financial, operational, cybersecurity, or reputational, risks are everywhere. But here's the thing: not all risks are created equal. Some are measurable, and some are based on personal judgment. This distinction between objective risk and subjective risk is crucial when it comes to assessing and managing risks within your organization.

So, let’s break down these two types of risk, their role in risk assessments, and how to leverage both to build a more effective risk management program.

What’s the Difference?

Objective Risk refers to risks that are measurable and quantifiable. These are risks that can be defined by data, numbers, or observable patterns. Think of them as the risks you can calculate and predict with some level of certainty. Examples include things like market fluctuations, production delays, or even cybersecurity threats (if you have the right data).

Subjective Risk, on the other hand, is much more personal and less quantifiable. It’s the risk that individuals perceive based on their experience, biases, and intuition. For example, one person might feel uncomfortable with an investment opportunity, while another might see it as a calculated risk. Subjective risks are often influenced by human judgment, emotional factors, or a person’s personal risk tolerance.

Why Both Matter for Your Organization

Here’s where things get interesting. Both objective and subjective risks play important roles in how an organization identifies, assesses, and mitigates risk. Let’s explore why they matter and how to use them together for better decision-making.

1. Objective Risk in Risk Assessments

Objective risk is foundational to any robust risk management strategy. It’s the data-driven part of the equation, and it often informs the overall framework for your risk assessments. By understanding the probabilities of certain events occurring and their potential impact, you can make informed decisions about how to allocate resources, implement controls, and prioritize actions.

For example, if you’re assessing the risk of a cyberattack on your organization, you might rely on objective risk factors like the number of attempted attacks, historical data on breaches, and industry reports about the frequency of cybersecurity threats. With this data, you can quantify the likelihood and potential damage of such an event, allowing you to take proactive measures.

2. Subjective Risk and Human Judgment

Where objective risk provides the numbers, subjective risk is where human intuition comes into play. We all know that not everything can be measured by hard data. Subjective risk accounts for things like leadership experience, intuition, and an organization’s culture. It’s the “gut feeling” people have when assessing risk or uncertainty.

A good example is the role of subjective risk in strategic decision-making. A new project or market expansion might seem like a low-risk move based on objective data, but the leadership team might have a different take due to past experiences, concerns about brand reputation, or regulatory uncertainties. This subjective assessment can lead to a more cautious or aggressive approach than what the data alone suggests.

How to Integrate Both into Your Risk Program

Now that we’ve broken down the difference, let’s talk about how to bring both objective and subjective risk into your organization’s risk management framework. Here’s how to leverage both effectively:

1. Don’t Rely on Data Alone

It’s tempting to rely solely on data when assessing risk. After all, it’s quantifiable, precise, and based on real-world occurrences. But to get a full picture, you need to incorporate subjective risk as well. Have key stakeholders, such as department heads, senior leadership, or even front-line employees, share their perspectives. Ask them how they feel about certain risks, what concerns they might have, and how they would approach mitigation. This can uncover hidden risks that data alone might miss.

2. Use Data to Test Gut Feelings

If you’re facing subjective risk factors (like gut feelings or concerns about an uncertain decision), it’s helpful to validate these intuitions with objective data. For example, let’s say a team leader feels nervous about expanding into a new market. You can run simulations, analyze historical trends, and look at market research to either confirm or challenge their perception of risk. This can help make subjective concerns more actionable and grounded in reality.

3. Quantify Subjective Risk When Possible

While subjective risk is harder to measure, that doesn’t mean it’s impossible. You can create frameworks that help quantify or rank the level of subjective risk based on factors like the expertise of decision-makers, past experiences, and cultural or emotional responses. By developing a way to measure subjective risk, you can better communicate its significance and use it in your overall risk assessments.

4. Engage Stakeholders in Risk Conversations

Risk management is never just a numbers game. Engage your team in open discussions about both objective and subjective risks. Create a space where people can share their perceptions of risk alongside the data and analysis. This collaborative approach ensures that your risk assessments are holistic and take all perspectives into account.

5. Create a Risk Dashboard that Combines Both

Consider building a dashboard that showcases both objective and subjective risk factors. For instance, you could include hard data on financial metrics, market trends, and industry reports, alongside qualitative assessments from leadership or employees. This can help you prioritize risks more effectively and ensure that no critical blind spots go unnoticed.

Key Takeaways

• Objective risk is data-driven and quantifiable. It’s based on numbers, probabilities, and observable data points.

• Subjective risk is influenced by human judgment, experience, and intuition. It’s personal and harder to measure but no less important.

• Both objective and subjective risks should be considered in your risk program to build a more comprehensive strategy.

• Integrate data with human insight: Use objective data to validate subjective perceptions and vice versa.

• Quantify subjective risks when possible to make them more actionable.

• Engage your team: Open discussions and a combined risk dashboard can offer a more holistic approach to risk management.

Actionable Insights

• Use data analytics to forecast potential risks, but don’t ignore the invaluable insights your team’s experience can bring.

• Encourage team members to share their concerns and perspectives during risk assessments, ensuring you consider the full spectrum of potential risks.

• Validate intuition with data: If subjective risk is at play, look for ways to back it up with objective metrics or historical data.

• Leverage both in risk mitigation strategies: Use objective data to identify specific, quantifiable risks and subjective assessments to prepare for uncertainties and emotional factors that can affect decision-making.

By balancing both objective and subjective risk, you can build a more resilient, well-rounded risk program that accounts for both the numbers and the human element, ensuring you’re better prepared for whatever comes next.