March & zur Shapira, Managerial perspectives on risk and risk taking, 1987 Flashcards
What does March criticise?
March criticises our assumptions about taking risks. Why do we choose to make risky choices?
What are our assumptions about risk taking?
Risk preference:
We trade risk for reward, it is always a gamble
Risk averse and risk seeking is a personality trait.
What is March’s view on risk taking?
Our risk taking propensity is influenced by the organizational context.
People high in the hierarchy both takes more risk and are expected to take more risks.
Therefore, risk averse and risk seeking traits are not enough to understand how organizations make decisions.
Conclusion: Why do people make risky choices?
Decision makers take larger or smaller risks because they make errors in estimating the risks they face.
Taking risks is highly influenced by the context.
Managers are faced with a dillema: on the one hand, they are encouraged taking risks, and on the other, they are expected not to fail, yet as we take risks, we also accept the possibility of failing.
Why managers take risk?
- Rational: risk vs. reward calculation
- Psychological personality trait: risk seeking vs. risk averse
Yet rational and psychological explanations were not enough to explain behaviour in organizations - We have a biased understanding of risks – We value impact over probabilities, and have difficulties dealing with very low and very high probabilities
Hence, we take risks, but not fully aware of its probabilistic consequences - We change depending on our situation:
Level of perceived success/failure (prospect theory)
Level of ownership of e.g. budget - Cynical view (main point): We add a veneer of rationality on top of our choices, i.e. we take calculated risks but never gamble, and we take risks that we are likely to succeed (i.e. we don’t really take risks, we just talk about it as such)
Paradox of risk taking and succes [NTS: ikke et begreb]
Foolish gambling: taking risks and fail.
Risk taking: taking risks and succeeding.
We expect managers to take risks, but we also expect them to succeed!
Hence, we deny uncertainty, and reward the lucky not the competent.
Motivation for the paper.
Motivation: Risk propensity (psychological traits) doesn’t explain why people take risks, as risk propensity seem to change in different contexts. Why do managers take risks then?
Core message:
Based on the analysis, they conclude that risk taking is neither rational, nor a personality trait (risk propensity), but rather contextual and constructed. Managers construct the action of ‘taking risks’ but not actually ‘gambling’. Three factors played an important role:
Insensitivity to probability: we don’t base our decisions on actual statistics.
Success vs. failure state: our propensity to take risk changes depending on our current state (success, failure, extinction)
Hence: We take risks (which are not that risky and hence succeed and shape context) and avoid gambling (actually accepting that we don’t know)
What is the implication? What is their advice for (senior) managers?
An implication:
General: We deny uncertainty, and reward the lucky not the competent.
An advice for managers: reconciliation between the contradiction between need to take risks and need to succeed by e.g. taking ‘safe bets’.
An advice for senior managers: “We may prefer to have managers imagine (sometimes falsely) that they can control their fates, rather than suffer the consequences of their imagining (sometimes falsely) that they cannot.”
Hvad er problematikken mellem strålende risikotagere og tåbelige gamblere i et historisk perspektiv?
Udfordringen er, at vedligeholde managerens omdømme, ved at de tager gode risici og undgår de dårlige.
”man skal være en risikotager, men man skal vinde mere end man taber”
I historisk perspektiv har vi ingen problemer med at skelne dem, der har været strålende risikotagere, fra dem, der har været tåbelige gamblere, uanset om forskellen kan have været på det tidspunkt, de har taget deres beslutninger. Således ses risikable valg, der viser sig dårligt, som fejl. Historien sorterer ikke kun beslutningstager fra vindere og tabere, men fortolker også disse forskelle som dømmekraft og evne.
Hvordan påvirker, hvor meget man har opnået af et mål, ens risikovillighed?
Managerne mente at der vil blive taget færre risikoer, når tingene kører godt. Omvendt vil det være forventeligt, at risikable valg tages, når tingene kører dårligt. Med andre ord, er risikovillighed afhængig af forholdet mellem nuværende position og nogle kritiske referencepunkter. De fleste managere føler, at det er mere berettiget at tage risici, når man står overfor manglende opfyldelse af et mål, end når målet er nået.
