How businesses should balance risk and opportunity during the coronavirus crisis

Start with the fact that there is so much about the virus that we don’t know: Will it mutate into an even deadlier form? Will the second wave be worse than the first? When will we have a vaccine, or an effective treatment—if ever? Then there’s the economic anxiety: Are we headed into a long depression? Will the financial consequences of “reopening” be even worse than the pain of the shutdown? 

Together these hard-to-answer questions add up to the perfect formula for maximizing the stress we feel. “Something that is really risky has two features,” says Hersh Shefrin, a professor at Santa Clara University’s Leavey School of Business and a leading expert in behavioral finance. “The first is that the consequences induce a sense of dread. Second, there’s a great deal of uncertainty, so we don’t feel we have control.” Check, and check. 

Living with the pandemic means navigating this new normal of pervasive risk. The drumbeat of grim news—more than 80,000 dead from COVID-19 in the U.S. by mid-May and over 30 million people out of work—is an accelerant for our fears. It can be paralyzing. And it triggers ancient, hardwired reactions in our brains that can undermine our decision-making. For business leaders, the extreme uncertainty only amplifies the threats they’re facing—to the health and well-being of their employees, to their companies’ short-term survival, and to their ability to plan for the long run. What’s key, say strategists, is to understand how risk affects our thinking and create systems that mitigate it and allow us to unlock new opportunities. 

Think near and far 

Amy Webb can feel the decision-fatigue setting in. It comes through loud and clear in the calls she is getting from her clients. “Everybody wants to know what’s next,” says Webb, the founder and CEO of the Future Today Institute, a management consulting firm. “They haven’t been in a position before where they’re having to make 1,000 decisions a day without any clear understanding of what’s coming.” One danger in that scenario is that leaders pull back and tighten their focus. “Everybody gets narrow,” says Webb. “You start to make decisions just based on the stuff that you already know really well.”

To break her clients out of that mode, one visual tool Webb uses is what she calls a “time cone.” The narrow end represents the near term, with tactics informed by the most data and evidence available. As you go further out in time, the cone widens to demonstrate the widening uncertainty of data and outcomes. That is the strategy zone. And it’s more important than ever right now, Webb argues, for CEOs to push themselves to imagine how the world is likely to evolve and decide how their companies want to compete in that new landscape.

This is a time when data matters more than gut. And certainly more than, ‘well, this is what we’ve always done in the past.’

AMY WEBB, FOUNDER AND CEO OF THE FUTURE TODAY INSTITUTE

As just one example of how quickly assumptions can change, Webb points to health care, “which is being transformed before our eyes.” Telemedicine is soaring by necessity. More consumers are ordering prescriptions online, and drone deliveries of supplies are beginning to take flight. And the need to ramp up coronavirus testing capacity could give another entry point to nontraditional players like Amazon and Walmart who are already circling the industry. All of these trends could spell opportunity for those who act boldly, and trouble for companies that stay in a defensive crouch. 

Webb believes that right now every big company should establish a triage organization to balance tactical and strategic modeling—a CentCom for the pandemic if you will. “This is a time when data matters more than gut,” says Webb. “And certainly more than, ‘Well, this is what we’ve always done in the past.’ ” 

Balance your biases

When Shefrin teaches behavioral risk management, the first bias he warns his students about is excessive optimism. “People are unrealistic about the likelihood that favorable events will happen to them,” he says. “But they especially think bad things are less likely to happen to them than is warranted.” Research shows that we tend to overrate our own skills, overestimate our control over events, and assume that we just aren’t the type of people that bad things happen to.

At the same time, we make different decisions in the heat of the moment than we would if we were in a so-called cold state. A classic example is that the more often a person checks stock prices in a falling market, the more likely she or he is to panic and sell. The uncertainty triggers our inherent sense of loss aversion—our well-being is impacted more by the fear of loss than the potential for gain. The solution is to create heuristics, or rules of thumb, while we’re at our most rational: triggers to buy stocks when prices fall to a certain level, for example, or sell when they rise high enough that it’s prudent to take profits.

Kristen Berman advocates that companies apply the same principles to their operational planning, particularly now. The CEO and cofounder of Irrational Labs, a behavioral design company, Berman suggests that business leaders conduct a reality check in advance on, say, how much they’re willing to invest in rehiring or what kinds of losses they can withstand in a given business line, knowing that a second wave of the pandemic could be devastating financially. “If we realize we have an optimism bias,” says Berman, “we can put in little checks to say, ‘What if it’s still going on at this point? What do I do?’ ”

Reset the mental model 

Back in 2016, a pair of researchers at the University of Bath in England published a study testing the “habit discontinuity hypothesis”—that it’s easier to change people’s behavior in a certain area, like recycling more or reducing water use, when they’re already making a major change, such as moving to a new home. Their results confirmed that people who uproot are more open to behavioral changes, and that the window of opportunity was greatest in the first three months.

That openness to change during a time of disruption, says Berman of Irrational Labs, means that the coronavirus crisis is a golden opportunity for companies to introduce a new “mental model” of their products or their business model to customers. The mental model is the understanding we have in our minds about how products and services work, and our relationship to them. Google Search is free. I pay a monthly fee to work out at the gym, not at home. The Amazon Fire tablet is for reading or watching movies. Once our habits are established, they’re hard to change.

Opportunistic companies are making the most of the window offered up by the pandemic. In March, for instance, at-home fitness company Peloton boosted the free trial period for its exercise app from 30 to 90 days, and got 1.1 million downloads in six weeks. In April, Amazon started giving away one-year free subscriptions to live and on-demand cooking classes for Fire users. Working out at home and cooking with Fire might become habits for many.

The strategy behind these experiments is one that virtually any company can and probably should apply right now. “The key is to look at the mental model that customers currently have with you, see if that’s the one you want to keep, and then redefine the mental model going forward,” says Berman. When uncertainty reigns, you might as well turn it to your advantage.

A version of this article appears in the June/July 2020 issue of Fortune with the headline “Facing the unavoidable risk.”