Risk and Factors Affecting Risky Decision Making
RISK – DEFINITION
Risk, by definition, is any course of action taken by an individual that may pose new threats, liabilities or losses to the status quo. By the definition theory, Risk means a decision leads to consequences that are not precisely predictable, but follows a known probability distribution. Risk taking is a phenomenal virtue of most successful executives and managers. The high crests and the low ebbs of most businesses are more often governed by this one factor “risk” taken by its decision makers. While more often the success is celebrated and the failure is chided, the risks involved is not weighed to totality. The concept of risk taking has played a central role in psychological research during the last decade.
In classical decision theory, risk is the variation in distribution in possible outcomes, likelihoods, and subjective values. Risk is also a non-linearity in the perceived utility of money or variance in distribution of possible gains or losses associated with a particular alternative (Pratt 1964; Arrow 1965). Risk is thus seen as a choice based on the expected value of return of an alternative. Standard theories assume decision makers prefer larger expected values. (March, J. G., & Shapira, Z., 1987).
Though the decision theory defines risk in terms of probability and numbers, we tend to evaluate risk differently. While risk can be perceived differently by different people, evolution towards the high-end technology and advances in terms of engineering would not have happened without risky decisions. But more often, people in organization tend to withhold themselves from thinking out of the box. Innovation and creativity are likely to be curtailed either by the individuals or by the organizational hierarchy that they are with. However, the success of any organization depends on how innovatively can it evolve in the ever changing business arena and for this, the organizations need be able to handle risk taking individuals and foster
Risk, by definition, is any course of action taken by an individual that may pose new threats, liabilities or losses to the status quo. By the definition theory, Risk means a decision leads to consequences that are not precisely predictable, but follows a known probability distribution. Risk taking is a phenomenal virtue of most successful executives and managers. The high crests and the low ebbs of most businesses are more often governed by this one factor “risk” taken by its decision makers. While more often the success is celebrated and the failure is chided, the risks involved is not weighed to totality. The concept of risk taking has played a central role in psychological research during the last decade.
In classical decision theory, risk is the variation in distribution in possible outcomes, likelihoods, and subjective values. Risk is also a non-linearity in the perceived utility of money or variance in distribution of possible gains or losses associated with a particular alternative (Pratt 1964; Arrow 1965). Risk is thus seen as a choice based on the expected value of return of an alternative. Standard theories assume decision makers prefer larger expected values. (March, J. G., & Shapira, Z., 1987).
Though the decision theory defines risk in terms of probability and numbers, we tend to evaluate risk differently. While risk can be perceived differently by different people, evolution towards the high-end technology and advances in terms of engineering would not have happened without risky decisions. But more often, people in organization tend to withhold themselves from thinking out of the box. Innovation and creativity are likely to be curtailed either by the individuals or by the organizational hierarchy that they are with. However, the success of any organization depends on how innovatively can it evolve in the ever changing business arena and for this, the organizations need be able to handle risk taking individuals and foster
References: 1. March, J. G., & Shapira, Z. (1987). Managerial perspectives on risk and risk taking. Management science, 33(11), 1404-1418. 2. PRATT, JOHN W., "Risk Aversion in the Small and in the Large," Econometrica, 32 (1964), 122-136 3. Llopis, O., Garcia-Granero, A., Fernández-Mesa, A., & Alegre, J. Managers ' risk taking propensity and innovation in organizations: the mediating influence of employees ' perceived risk taking climate. 4. Vroom, V. H., & Pahl, B. (1971). Relationship between age and risk taking among managers. Journal of Applied Psychology, 55(5), 399. 5. Maxfield, S., Shapiro, M., Gupta, V., & Hass, S. (2010). Gender and risk: women, risk taking and risk aversion. Gender in Management: An International Journal, 25(7), 586-604. 6. Bozeman, B., & Kingsley, G. (1998). Risk culture in public and private organizations. Public Administration Review, 109-118. 7. Hoskisson, R. E., Hitt, M. A., & Hill, C. W. (1991). Managerial risk taking in diversified firms: An evolutionary perspective. Organization Science, 2(3), 296-314.