I know of a large American company in which the Chairman/CEO and President were never allowed to fly together in the corporate jet. The perception was that a plane crash would be devastating to the company from a succession standpoint. However, the pair of them frequently tooled around in the same automobile. If anyone, including these two very intelligent men, had asked the simple question, "Which is more risky, the plane or the car?" a well-meaning but silly corporate policy might have changed. But we (and this includes all of us) frequently fall short in our ability to determine the relative risk of one activity over another. This inability to estimate and forecast risk correctly can have extremely damaging consequences for our businesses and teams.

In his bestselling book, Against the Gods: The Remarkable Story of Risk, author Peter L. Bernstein tells us, "The word 'risk' derives from the early Italian risicare, which means 'to dare.' In this sense, risk is a choice, rather than a fate. The actions we dare to take, which depend on how free we are to make choices, are what the story of risk is all about. And that story helps define what it means to be a human being."

Bernstein further explains that "When the growth of trade transformed the principles of gambling into the creation of wealth, the inevitable result was capitalism, the epitome of risk-taking." But he argues capitalism could only flourish with the development of two new concepts: bookkeeping, which allowed for the quantification and tracking of business results, and forecasting, which is a "...challenging activity that links risk-taking with direct payoffs." Indeed, in Bernstein's view, "The successful business executive is a forecaster first; purchasing, producing, marketing, pricing, and organizing all follow." In other words, the best business leaders are those that are especially adept at properly assessing risk.

Nevertheless, obstacles come in many forms, even for the most skillful forecasters. In a classic Harvard Business Review article from 1998 entitled, "The Hidden Traps in Decision Making," scholars John S. Hammond, Ralph L. Keeney, and Howard Raiffa describe three common traps that impact the quality of our assessments and predictions about uncertain events.

First, leaders succumb to the "overconfidence trap." Human beings are generally not very good at estimating the outcome of uncertain events, yet we have a strong tendency to overestimate our own abilities. This phenomenon is nicely summarized by Stanford professor James G. March in his book, A Primer on Decision Making: How Decisions Happen, March says, "Decision makers tend to exaggerate their control over their environment, overweighting the impacts of their actions and underweighting the impact of other factors, including chance. They believe things happen because of their intentions and their skills… more than because of contributions from the environment. This tendency is accentuated by success. As a result… there is a strong tendency to treat uncertainty as something to be removed rather than estimated."

The second pitfall is the "prudence trap," which describes the very natural human tendency to be overcautious when faced with a risky and important decision. The HBR article cites the example of a Big Three U.S. automaker that, in anticipation of extremely high sales volume, collected forecasts from various departments that each overestimated the number of cars that should be produced, "just to be on the safe side." The cumulative effect of the prudence trap for this organization was gross overproduction and excess inventory that eventually had to be sold at reduced prices.

The final obstacle is the "recallability trap," which results from our strong tendency to recall and be overly influenced by dramatic events from our past in making predictions about the future. The HBR article says, "We all, for example, exaggerate the probability of rare but catastrophic occurrences such as plane crashes because they get disproportionate attention in the media."

We also tend to possess a skewed memory about the frequency of various events. Professor March explains, "Decision makers tend to overlook important information about the base rates of events. Even though the greatest hitters in history were successful only about 40 percent of the time in their best seasons, there is a tendency to expect great baseball hitters to hit whenever they bat, because hitting is what is prototypical of great hitters. Similarly, although great designers produce exceptional designs only a few times in a lifetime, every failure of a great designer to produce a great design is experienced as surprise."

What can you do as a business leader to improve your ability to properly assess risk?

• Ability to overcome obstacles starts with the recognition that obstacles exist. Simple awareness of such tendencies as the overconfidence, prudence and recallability traps in all of us, including capable and experienced leaders, represents the first step. Recognizing that you might fall prey to these pitfalls in your decision making goes a long way toward enabling you to consciously avoid them.

• Challenge your own assumptions, especially when you feel confident that you are right. Ask yourself which incidents from your past are influencing your present decision. Seek information and input from many sources, especially when a high-risk decision is at stake. Ask peers and subordinates for their estimates and challenge them as well.

• Use facts in making your assessments. Don't rely on stories or anecdotes, but use hard data.

• When confronted with information that puts into question or even directly contradicts your own point of view, be open to the new input. Analyze your options honestly and with a willingness to be proven wrong.

With these simple steps, the probability that you will become a more skilled business forecaster is high. Your odds will never be perfect, but with hard work and sensitivity to obstacles, I predict great things for you and your team.