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Why Managers and Companies Take Risks

:	Les Coleman
:	Why Managers and Companies Take Risks
:	Physica-Verlag
:	9783790816969
:	1
:	CHF 85.30
:

:	Management
:	English

:	351
:	Wasserzeichen/DRM
:	PC/MAC/eReader/Tablet
:	PDF

The book answers a simple question: when managers and companies face a decision with two outcomes that are safe and risky, what leads them to choose the risky alternative? The answer starts with a detailed review of the theory behind risk and decision making by managers. The book then gathers real-world evidence using two surveys of senior managers and directors to analyze why they take risks, and how companies control risks.

CHAPTER 4 Real-World Decision Making
Under Risk (S. 63-64)

This chapter provides a summary of the Hterature on real-world decisions by individuals who face risk, and complements previous discussions which looked at the theory of risk-taking and reported the findings of experimental behavioural studies.

The chapter begins with a description of the principal studies which are representative of individuals' risky problem solving in the real world, then reports relevant findings from studies of racetrack wagering markets, and closes with a summary and brief conclusions.

Principal Studies

Empirical studies which illuminate real-world decision making under risk or uncertainty fall into two broad categories. The first measures individuals' ex ante beliefs, for example by using case studies describing a typical real-world decision [e.g. Sitkin and Weingart (1995)], or in controlled experiments that simulate real-world outcomes [e.g. Fox and Tversky (1998)].

The second type of study involves ex post analysis of micro-economic data which reveals the collective outcome of many people's individual decisions in relation to the same question. An example is Lease et al. (1974) who accessed the trading history of customers at a New York broking house and sent them a questionnaire. A warning to readers, though, is that studies of this type are few as most field studies have not attempted to incorporate personality or demographic measures, but deduced risk attitudes from large, anonymous groups.

Personality and Risky Decision Making

Common management strategies (such as personnel selection, training and placement) rely on stability in individuals' personality and assume that managers make similar decisions across varying situations. Thus it is not surprising to find a considerable number of real-world studies link personality to risk-taking.

MacCrimmon and Wehrung (1990) obtained comprehensive data on the characteristics and behaviour of 509 senior executives in North America, and developed 13 measures of personal and business risk. They found that risk taking rose with professional success, and declined with age and education. Williams and Narendran (1999) included a test to evaluate the need for achievement in their study of managerial risk-taking and found it correlated (r=0.33, p<,0.01) with managerial risk preference.

Smith and Friedland (1998) obtained survey responses from 102 mid level nurse managers in 14 US hospitals. Risk taking was more likely amongst managers with at least a bachelor's degree, higher autonomy orientation (a world that is supportive of free choice), and lower control orientation (the environment constrains behaviour to norms). Trimpop (1994: 281) prepared a comprehensive study entitled The Psychology of Risk Taking Behavior and concluded that:"personality risk factors play a significant role in risk taking behavior, but they play a less important role (5-25 percent of variance explained) than situational factors do."

This may be too low an estimate based on the table below which summarises the amount of variance in risk-taking which published studies found was explained by personality. These contemporary studies in realworld settings suggest that about 30 percent of risk propensity is explained by personality.

	Preface	6
	Contents	8
	CHAPTER 1 Introduction	12
	Research Problems Tackled by this Book	12
	The Analytical Strategy of this Book	18
	The Contribution of this Book	25
	This Book in Context of the Literature	27
	CHAPTER 2 Theory of Risk and Decision Making in Management	32
	Definitions of Risk	32
	Incorporation of Risk into Decision Making Theory	39
	Specifying Managerial Risk Preference	42
	Summary and Conclusions	49
	CHAPTER 3 Behavioural Evidence on Risic and Decision Making	52
	Human Studies of Risk and Decision Making	56
	Summary of Experimental Findings	67
	CHAPTER 4 Real-World Decision Making Under Risk	74
	Principal Studies	74
	Bayesian Considerations in Risky Decision Making	87
	Other Influences on Risky Decision Making	91
	Decision IVIaking Evidence from Racetrack Gambling	92
	Discussion	96
	Summary	100
	CHAPTER 5 Risk-Taking and Organisation Performance	102
	Financial Risk and Performance in Organisations	102
	Studies of the Impact of Risk on Firm-Specific Retums	107
	Company Influences	107
	Longshot Bias in Organisations	114
	Summary and Conclusions	118
	CHAPTER 6 Published Models of Decision Making Under Risk	126
	Models of Decision Making Under Risk	126
	Mathematical Models	126
	Prospect Theory: Does It Describe Reality?	130
	Discussion and Conclusions	153
	Inadequacies of Current Decision IVIaking IVIodels	155
	CHAPTER 7 Why Managers Take Risks	160
	Summary of Decision Making Behaviours	160
	Research Methodology	165
	Measures of Survey Respondents' Personal Traits	170
	Research Deficiencies	175
	Managerial Risk Taking: Carter Racing Team Scenario	176
	Discussion	190
	CHAPTER 8 How Companies Control Risks	196
	Data and Respondents' Characteristics	196
	Organisational Risk Strategies	198
	Executives' Perceptions of the Business Environment	205
	Executives' Attitudes Towards Risic	206
	Risk Outcomes for Organisations	210
	Influence of Risk on Financial Results	220
	Corporate Risk Propensity	222
	Discussion	228
	CHAPTER 9 Summary and Discussion	236
	Influence of Risk on Real-World Decision Making: An Update of Applied Behavioural Economics	236
	Identification with Outcome	247
	The Links Between Risk and Organisation Performance	252
	Measures of Organisational Risk	252
	Conclusion	258
	CHAPTER 10 Risk Budget Theory	260
	Key Elements of Decision Making Under Risk	260
	Decision Maker Personality and Perception	260
	Outline of Risk Budget Theory	266
	Risk Budget Theory	266
	Discussion	272
	Validation of Risk Budget Theory	276
	RBT's Explanation of Financial Decisions	276
	Conclusion	281
	CHAPTER 11 Conclusions	288
	Answers to the Research Questions	288
	What Leads Managers to Choose a Risky Alternative?	288
	Enterprise Level Risk Strategy	292
	Endnote	300
	Letter to Potential Respondents	303
	References	338
	Index	358