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Managerial perspectives on risk and risk taking
Transcript of Managerial perspectives on risk and risk taking
in the distribution of possible outcomes, their likelihoods, and their subjective values.
Specimen theoriae novae de mensura sortis, Bernoulli (1738) :
Introduction of the utility function. The individual is considered rational. Relation between decision theoretic conceptions of risk and the conceptions held by executives. Managerial perspectives on risk and risk taking Understanding risk taking by managers Conclusion Conception of risk held by managers Definition of risk: Thanks for listening
Any questions? Period and authors Attitudes toward risk 3 motivations for risk taking: Managers do not equate risk with variance in potential outcomes.
Three obvious differences are:
Risk is more seen as a danger or hazard, with negative outcomes only
Risk is not a probability concept, but defined as the amount potentially expected to loose
They feel risk cannot be captured in a single number Managers tend to think that risk is a preference based on:
level in hierarchy
- Managers see themselves as higher risk takers than others
- They justify particular choice if big potential losses are balanced by big potential gains Dealing with risk: Risk taking is essential to being successful, it is a part of being manager
They see risk taking as thrilling
They take different risks depending on the situation Managers tend to avoid risk. Risk behavior is characterized by a non-linear utility curve Risk Theory Example of a risk-averse person Choice : Expected Value W Gambling Choice with certainty Perfect consideration and weighting between volatility and gain depending on the "model of the person" Value Variance Risk Theory The Definition of Risk Attitudes toward Risk Issue Variance Value Choice among Variance/Value combinations Perfect consideration and weighting of
variance and value There are three main differences between manager risk taking and theory A test together Your attitude toward risk Managers do not look at probability statistics and ignore unlikely outcomes
They judge risk by outcome value Lakshminarayanan, V., Chen, M. K., & Santos, L. R. (2011).
The evolution of decision-making under risk: Framing effects in monkey risk preferences.
Journal of Experimental Social Psychology. Will you follow the theory or not ? The behavior depends on the context and conditions Risk preferences varies with context and aspiration level
People can only focus on a few factors at a time Society rewards outcomes not decisions
Gambling is risk taking that turns badly Paper published in 1987 in Management Sciences
March & Shapira : Stanford & HUJ
Decision making; Risk; Management
Based on :
- risk attitudes and behavior among managers The paper: - decision theory Consideration of several papers between the 50's and 1987 Allais (1953) MacCrimmon & Wehrung (1986) Slovic (1967) Krunreuther (1976) Lopes(1987) Gambling Taking risks
High Gain High risk
A person is rational cannot take into account all the data
choice depends on circumstances Managers don't follow rules of Decision Theory,
especially their conceptions of risk are inacurrate. Training in decision theory may be useful, however: They see risk as something they can control. They make a difference between gambling and risk taking Managers can make a difference between gambling and risk taking because they think they can control the odds. Such training might make decision makers more passive Risk behavior tend to be embedded in social norms