Managerial Perspectives on Risk and Risk Taking

Abstract

This paper explores the relation between decision theoretic conceptions of risk and the conceptions held by executives. It considers recent studies of risk attitudes and behavior among managers against the background of conceptions of risk derived from theories of choice. We conclude that managers take risks and exhibit risk preferences, but the processes that generate those observables are somewhat removed from the classical processes of choosing from among alternative actions in terms of the mean (expected value) and variance (risk) of the probability distributions over possible outcomes. We identify three major ways in which the conceptions of risk and risk taking held by these managers lead to orientations to risk that are different from what might be expected from a decision theory perspective: Managers are quite insensitive to estimates of the probabilities of possible outcomes; their decisions are particularly affected by the way their attention is focused on critical performance targets; and they make a sharp distinction between taking risks and gambling. These differences, along with closely related observations drawn from other studies of individual and organizational choice, indicate that the behavioral phenomenon of risk taking in organizational settings will be imperfectly understood within a classical conception of risk.decision making, risk, management

Gain/Loss Asymmetry in Risky Intertemporal Choice

“…Since Fisher's (1930) Loewenstein &Prelec, 1989a and1989b;Shelley, 1990). Some of these departures were identified by early theorists as causes of inconsistent intertemporal choices and suboptimal planning (e.g., Strotz, 1955 andThaler, 1981 (Strotz, 1955;see also Thaler, 1981 (Thaler, 1981 ;Benzion et al, 1989;Shelley, 1990 Conard, 1963;Stevenson, 1986;Benzion et al, 1989 (1989) and Stevenson (1986), the multiple-period extension has not been supported and is not addressed in this study (Benzion et al, 1989 (March & Shapira, 1987 …”

“…In Figure 6 gain and loss discount rates appear to be converging, but Figure 7 shows that once the implicit risk rate has been extracted, gain and loss rates appear on visual inspection to decline at about the same pace. (Lopes, 1987;March & Shapira, 1987). It now appears that payoff timing is a dimension of context that influences risk preferences.…”

“…It now appears that payoff timing is a dimension of context that influences risk preferences. March and Shapira (1987) (Mischel & Ebbesen, 1970;Mischel, Grusec, & Masters, 1969;Lopes, 1987;March & Shapira, 1987 (March & Shapira, 1987, p. 1412Lopes, 1987 …”

“…Women who want to experience natural childbirth demand in advance that their doctors withhold pain medication to preserve the memory of the birth, but at the onset of labor, they renege and demand relief (Christensen-Szalanski, 1984;Schelling, 1984 On the other hand, when risk is involved, the intertemporal difference in the cost/benefit balance could be due to decision makers' perceptions of risk; decision makers may exhibit an optimistic tendency to believe they can control the odds or the magnitude of potential future loss (March & Shapira, 1987). This perception would create a discrepancy between subjective discount rates for future negative and positive outcomes.…”

Security Design with Status Concerns

“…It is argued that real companies, when deciding how much risk to take, consider their current performance relative to a certain aspiration level, a target that a company tries to achieve (see Audia and Greve (2006) and the literature review therein). A common argument in this literature is that "managers seem to feel that risk taking is more warranted when faced with failure to meet targets than when targets were secure," and that "executives ... would not take risks where a failure could jeopardize the survival of the firm" (March and Shapira (1987)). This patterntaking risks when below but near the target and avoiding risks when either above or well behind the target-mirrors the idea of Friedman and Savage used in this paper.…”