How to make better decisions by knowing your risk tolerance

The new COVID-19 normal will require everyone to live with a level of infections and deaths in their communities.

To say that we will have zero or near-zero COVID-19 infections and deaths will not be realistic, practical or sustainable for many countries.

“Towards Zero” campaigns have been part of our lives. They seek to bring awareness to things like road fatalities.

The reality is that the cost — direct and indirect — incurred for achieving zero or near-zero COVID-19 infections and deaths will be enormous and unsustainable. It will impact individual lives, employment prospects and economic growth. There will be enormous trade-offs and unintended consequences that need to be managed.

What’s your tolerance for risk-taking?

The key question that you need to ask — What is your tolerable and acceptable level for risk-taking to achieve your objective?

What is the acceptable level of road fatalities that you will consider as ‘normal’? (It could be political suicide to publically declare that the Government is prepared to accept 10 road deaths per day as normal and it is not going to do anything extra-ordinarily more. )
How many people will you allow to die in public hospitals, given that hospitals are places to treat unwell or dying patients? (I am reminded of Joseph Stalin’s quote — The death of one man is a tragedy, the death of millions is a statistic.)
What is the acceptable level of COVID-19 infections and deaths that you will tolerate so that you can live a ‘COVID-normal’ life?

Knowing your level of tolerance will play a big part in how you make future decisions to achieve your objective. It will also determine what actions you will take for a better outcome or performance.

Risk tolerance refers to the level of risk-taking that is acceptable to achieve a specific objective or achieve a better outcome or performance. It represents the practical application of your risk appetite.

Always start with your risk tolerance

Our decisions and actions should be initially framed around our tolerance for risk-taking.

In the case of COVID-19, the key question is — What is the acceptable level of COVID-19 infections and deaths that you will tolerate so that you can live a ‘COVID-normal’ life?

While each country is contextually and culturally different, mandated lockdowns and social isolations are unsustainable. They are also detrimental in the long-term.

Between January 2020 and 25 September 2020, there have been approximately 979,388 COVID-related deaths reported worldwide. The different levels of tolerance for risk-taking are demonstrated through the application of different COVID-19 response strategies in various countries, as shown below.

The U.S. and India have a higher level of risk tolerance for COVID-related cases when compared to countries like Taiwan and New Zealand. Both Taiwan and New Zealand have implemented their chosen response strategy swiftly, while the U.S. has been lagging in its responses..

The key to reopening of economies in a new COVID-19 normal lie in our understanding of risk tolerance. People must understand their level of risk tolerance by identifying the acceptable number of locally acquired infections and the number of deaths for living in a new COVID-normal.

A decision-making matrix for COVID-19 reopening

Let’s work through an example of how we can make better decisions, develop and implement the right strategy and take the appropriate actions by knowing the acceptable level of our risk tolerance.

The decision-making matrix, shown below, could help decision-makers think through their COVID-19 strategies for reopening their organisations, economies and boarders after a lockdown or isolation. It could be modified to suit various circumstances and context.

The chosen strategy is based on the level of risk tolerance.

There are two main strategies required for a COVID-19 response — the elimination strategy or the suppression strategy. The level of risk tolerance is low for an elimination strategy. Risk tolerance is high for a suppression strategy. The suppression strategy, though seeking to quash community transmission, is usually classified as disease control.

A COVID-19 response is also based on the capability and capacity to implement the chosen strategy by governments, population size, geographical outreach, politics, culture, economic wealth, etc.

The chosen strategy should then be ruthlessly executed without wavering.

Unfortunately, we have seen countries and states that have wavered on their strategy implementation. Politics then took over, unfortunately. Some have changed their strategies mid-way and caused significant harm.

Components of the decision-making matrix

The application of this decision-making matrix is based on:

Level of risk tolerance that is linked to the acceptable number of locally acquired infections and the number of deaths for living in a new COVID-normal — The answer to the key question will drive all future decisions, strategies and actions.
Effectiveness of public health responses. There are six components necessary for an effective public health program.
The economic activity required or expected in the future — The 2020 Great Lockdown has caused the worst global recession since the Great Depression, far worse than the 2009 Global Financial Crisis. The International Monetary Fund has projected that global growth in 2020 to fall to -3%. This is a downgrade of 6.3 percentage points from January 2020, a major revision over a very short period.
Public confidence and trust that COVID-19 is under control. The public must see or experience that their governments are working actively in keeping COVID-19 under control and within acceptable levels. Managing and maintaining public trust and confidence will be vital for all governments.

When risk tolerance is low and there is a requirement or expectation for lower COVID-19 infections and deaths, there must be more effective public health responses implemented.

There will be a correlation between your risk tolerance and the effectiveness of your public health response.

The unintended consequences of mandating lower levels of COVID-19 infections and deaths will include restricting movement and freedoms for longer periods, at least for the initial period.

When this occurs, there will be a lower economic activity, even triggering a severe recession. Business and workplaces are forced to shut down — temporarily or permanently. Many workers will be forced into unemployment and social welfare programs.

Ineffective public health responses will only increase the number of COVID-19 infections and deaths.

What the ideal situation will look like?

The ideal situation assumes that the risk tolerance for COVID-19 infections and deaths is low.

The outcome:

Keeping COVID-19 infections and death at the lowest possible level through the ruthless implementation of effective public health responses. Unfortunately, not many countries have been able to deliver effective public health responses. The cost of delivering such effective and coordinated public health responses will be high.
Increasing and maintaining public confidence and trust that COVID-19 is under control. To do so, stakeholder engagement and communications must be effective. When this occurs, economic activity and growth will resume, eventually. Research by McKinsey concluded that “ending lockdowns alone won’t restore confidence or growth. Only when the novel coronavirus is under control will economic growth resume.”

The best or ideal case to work towards or aim for will be the green cell, as shown in the decision-making matrix.

Once you know how your ideal future looks like, it is time to choose and implement the strategies and actions to get there. Your risk tolerance will drive and determine your future strategies and actions to get to the outcome you are seeking to achieve.

What happens when your risk tolerance is high?

When your risk tolerance is high, there will be a higher tolerance for COVID-19 infections and deaths. There is no longer a need to deliver such an effective public health response.

Higher risk tolerance for infections and deaths also means lower public confidence and trust that COVID-19 is under control. People will read about the escalating numbers daily. They will feel nervous and anxious.

Economic growth and business activities can be negatively impacted in societies where their risk tolerance is high, as McKinsey has found. Confidence and trust in their governments are low. Stakeholder engagement and communications are lacking or ineffective.

It will be interesting to see whether governments can increase their public confidence and trust through awareness and political messaging as to why there is a higher tolerance for COVID-19 infections and deaths.

There may be circumstances where we have no choice but to accept a higher level of risk tolerance. Politics is one key reason for a poor outcome.

An effective public health response requires six actions

There are six components necessary for an effective public health program:

Innovation to develop the evidence base for action.
A technical package of a limited number of high-priority, evidence-based interventions that together will have a major impact.
Effective performance management especially through rigorous, real-time monitoring, evaluation and program improvement.
Partnerships and coalitions with public-sector and private-sector organisations.
Communication of accurate and timely information to the health care community, decision-makers and the public to initiate positive behaviour change and active public engagement.
Political commitment to obtain resources and support for effective action.

Public confidence and trust could be the deciding factor

McKinsey noted that building public confidence and trust requires limiting the spread of COVID-19 and creating a conviction that your public-health measures will continue to be effective.

The evidence that the public needs to build and maintain their confidence and trust will include the following:

New case counts that are low and that testing is sufficiently widespread for official counts.
The number of serious COVID-19 cases that require hospitalisation can be effectively handled by the health system without impairing its capacity to deliver normal medical treatment.
Communication about health interventions by your leaders is credible, consistent, and provided sufficiently in advance to let families and the public and private sectors plan.
Public health measures are delivered effectively and are sufficient to prevent increases in transmission.
Public health interventions, including those deployed for high-risk and vulnerable populations, do not structurally prevent economic recovery.

Towards making better decisions by knowing your risk tolerance

The COVID-19 example above is a practical example of how we can make a better decision and achieve a better outcome and performance.

Here are the steps and activities for making better decisions:

Know the problem you are solving — People tend to jump into solution mode without fully understanding the problem at hand. Truly knowing the problem will give you the clarity to your solution.
Picture what success looks like and how to measure that success — The future vision of your end game will give you the required focus and clarity. Everything you do must bring you closer to your goal.
Reframe the problem statement as an objective — Sometimes it may be beneficial to reframe the problem statement into something that you can strive for and motivates you.
Determine your risk tolerance for risk-taking and the achievement of your objective — Each person has different levels of risk-taking. Your personality and circumstances will determine the level of risk-taking you will be prepared to take to achieve your objective. This will set the foundation for all your future strategies and actions.
Identify the key strategy to achieve that objective — Focus on one key strategy to implement especially if it can be evidence-based. Where appropriate, go for the harder strategy, the road less travelled for maximum results.
Understand the trade-offs and possible unintended consequences of our chosen strategy — There is a cost to everything we do. Our actions will be determined by our capacity and capability. It also depends on our resourcing, funding and context.
Develop a 2×2 or 3×3 decision-matrix — Clearly represent the trade-offs and risk tolerance in a fit-for-purpose decision-matrix, as shown in the diagram above. This matrix will be unique in every circumstance. It will guide your future direction and actions.
Identify the challenges/risk and opportunities that will prevent/enhance the achievement of your objective — Focus on challenges. Avoid negativity where possible. Understand the opportunities instead.
Execute/implement your chosen strategy ruthlessly and without wavering — Strategy execution is hard work. It takes discipline. Mid-way change-over to another strategy could be confusing and detrimental to the outcome you want to achieve. It creates distrust and lack of confidence.
Communicate and engage with your stakeholders to build confidence and trust — Bring your stakeholders along the journey. Cultivate and strengthen confidence and trust. When trust is lost, the game is lost.

There is always a better way to make decisions, implement a strategy and take action when there is a systematic way for doing so.