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Risk taking to get ahead


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Risk taking to get ahead

  1. 1. Risk Taking to Get Ahead By Chelse Benham “There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction.” - John F. Kennedy There are those people who prefer risk and those who avoid it. The difference between the way they make decisions involving gains and losses is a large area of study among experts. Researchers and psychologists, Dr. Daniel Kahneman, 2002 Nobel Prize winner at Princeton University and Dr. Amos Tversky at Stanford University, studied the way people make decisions that involve gains and losses. In their “Prospect Theory”, Kahneman and Tversky insist that people are not risk-averse. According to the researchers, people are willing to gamble when they determine that it is appropriate. Their studies have produced compelling information about decision making where it concerns risk. When large assets are involved, most people will reject a fair gamble i.e. 50/50 chance for a certain gain with less return. A person makes decisions evaluating three features of the situation: the decision to be made, the chance and unknown events which can affect the result, and the result itself. However, what ultimately determines the way people make choices and how successfully they do it is of intense interest to business experts. According to Herbert S. Kindler, director of the Center for Management Effectiveness, there are qualities that define people who prefer risk and those who do not. In his article, “The Art of Prudent Risk Taking” in the Training and Development Magazine (52 no. 4 32-5 April ’98) a risk-preference behavior is found in people who: • underestimate uncertainties • act based on over optimism • seek excitement and novelty • overestimate the probability of attaining the desired outcomes • decide impulsively Their motto in life might be: nothing ventured, nothing gained. Many people, however, do not like to make decisions that concern risk. They deliberate and obsess over making a decision at all and they often avoid risky situations. Tversky writes, “The major driving force is loss aversion. It is not so much that people hate uncertainty – but rather, they hate losing.” Losses can appear larger than gains, especially if losses that go unresolved have provoked intense, irrational fears about taking risk. This fear can lead to what experts term “decision regret.”
  2. 2. Psychologist David Bell suggests that decision regret results when a person obsesses on resources that might have been had the right decision been made. It is akin to reflecting on an event with “20/20 hindsight” after knowing the outcome. This type of overanalyzing can incapacitate and hijack decision making. Kindler identifies the characteristics of a person who has risk-aversion tendencies. People who fall in this category demonstrate the following: • overestimate uncertainties • defer taking action based on over-pessimism • prefer security and comfort • underrate or ignore the probability of attaining the desired outcomes • postpone making a decision or close the door too quickly Their motto in life might be: better safe than sorry. Risk experts suggest that the ability to recover from loss should be the first consideration for people wrestling with uncertainty. It is important to distinguish between risks that are reversible and risks that are difficult to reverse. Risk is ultimately a byproduct of uncertainty, and the best weapon against uncertainty is knowledge. According to the article, “How to Take Risks in a Time of Anxiety” found in Inc. magazine (25 no. 5 76-8, 80-1 May 2003), the knowledge required to judge wisely falls into four categories. 1. Know your personal biases and how they those biases might influence judgment. 2. Know the statistical probability of success and the magnitude of potential failure. 3. Know what the experts think. 4. Know the Achilles’ heel, weaknesses to the situation. New York University’s Stern School of Business Management professor Dr. Zur Shapira suggests, “History should not matter. Every economic decision should be based on what’s going to happen from here to the future, but that is not how people look at it.” Experts suggest that bad risk-reward decision making can be improved in two ways. First, a person should be aware of biases, misperceptions and distortions about a situation concerning a decision. What information constructed from past experience and relevant factual data is being taken into account. Is that information rational and based upon reliable sources? Evaluate the source and breadth of the information that is being taken into consideration. Consider how much personal ego is involved in the decision. Experts agree that entrepreneurial errors are often influenced by hubris.
  3. 3. “The entrepreneur will say, ‘I’ve succeeded three times so it is likely I will succeed again,” Shapira comments. “But there are many examples where people succeeded three times and then failed, or failed three times and then succeeded. We call this the belief in the law of small numbers, or the ‘gambler’s fallacy.’” Be careful how predisposition affects the decision. Second, reframe the choices in new ways. This method is used in therapy and requires looking at any event or situation from another, or several, points of view. Reframing is looking at a problem or idea from a new framework of understanding, to break out of mindtraps. Lastly, stick with what you know best. This is not to suggest you should not learn to become more proficient and expand your capabilities. However, it is important to understand your capabilities and what is necessary if you really want to make the best decisions. Knowledge is power and it is the foundation of good decision making.