Risk Attitude and Risk Management – How we Fail to Agree About Risk

risk

Have you ever noticed that your attempts at conversations about risk sometimes seem to completely fail to connect?

Well, it turns out that in many cases the reason for the disconnect is that people’s beliefs about risk fall into four distinct “risk attitudes”.  And these risk attitudes are largely mutually exclusive.  One or at most a pair of these four beliefs tends to dominate a firm.  And if the risk management specialist has a different risk attitude from the predominant risk attitude of the firm, it will be difficult for her to get anything done.

Folks with one of these risk attitudes are big fans of formal risk management. Others think that ideas such at risk tolerance are scary because they encourage dangerous behavior. Then there are those who see formal risk management as a business prevention program. But most people just tune out when they hear someone talking about risk management. These four attitudes towards risk and risk management are examples of four archetypes of risk perception developed by anthropologists in the 1980s and 1990s. Their general approach to explaining the ways that people choose to form groups within a society is called the theory of plural rationality. Plural Rationality theory says that the way that people think of risk is not just “a” key driver, but that it is “the” key driver for group behavior.

What the Studies Show

Studies by anthropologists show that risk perspectives fall into four groups:

  • Pragmatists do not believe that the future is very predictable—so they try to keep their options open and seek freedom to react to changing conditions.
  • Maximizers who believe that risk in and of itself is not very important—profits are important – and risk is essentially mean reverting anyway. Businesses managed according to this perspective are willing to accept large risks, so long as they are well compensated.
  • Conservators, in contrast, are very concerned about risk and are anxious to avoid it, even if that means foregoing some degree of profit because they see the world as fairly dangerous.
  • Managers who believe that careful balancing of risks and rewards is the most important aspect of risk management. Firms following this view employ experts to help find risks that offer the best rewards, while at the same time managing these risks appropriately in a moderately risky world.

Does one of those perspectives sound especially familiar?  You may be disappointed to learn that these beliefs are persistent in human affairs according to the anthropologists who have been working with this for 30 years.  That is because the world that we all live in goes through periods when one by one, these beliefs are affirmed by the experiences that we have with risk in the environment where we operate.

But these beliefs are not static because as the state of risk in the world changes, we are surprised that our old risk attitude does not match well with our experiences.

For more on the theory of plural rationality see my blog for The Harvard Business Review: What’s Your Risk Attitude? (And How Does It Affect Your Company?)

About Dave Ingram

Dave is an Executive Vice President of Willis Re, specialising in theory and practice of ERM for insurers. Based in…
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