You Are What You Risk
What makes people take risks? Why do some of us make the preparations we need to succeed, but others miscalculate, often with fatal results? Why do some of us think of danger where others see opportunity? The answer matters for decisions people and nations make every day, from the mundane to the existential, involving relationships, health, finance, safety, career, and community. The forces behind our risk decisions are especially relevant for businesses and investors, whose choices create and destroy wealth and livelihoods, careers, and reputations.
The reasons we choose to face or ignore the dangers and opportunities in front of us may surprise as much as they enlighten. So many things shape how we perceive and rank risks: demographics, upbringing, career choices, religion, geography, culture, past experiences, generations, media, decision processes, organizational design… the list goes on. But unexpected factors—your height, what you look like, what you ate today, what language you speak, and what music you listen to—play a bigger role than you might think. Even the people who consider themselves to be highly rational, are buffeted by emotions, cognitive biases, and the rush of hormones through our veins. We ignore them at our peril.
In business, it’s not just talent or skills that make the difference: it’s character, which often shows up in risk judgments. One of the biggest reasons business partnerships fail is personality clashes. This often overlaps with diverging visions for the business. Risk attitudes are a big part of both. On the job, differences in risk sensitivities and experiences affect how well teams collaborate, and how well management handles tough choices—like whether or not to take big risks with safety, the law, and shareholders’ money. They are a major driver behind the behaviors of boards and CEOs.
Who Thinks What about Risk and Why
We behave differently in groups than we do when we are alone. Social scientists call this phenomenon “risky shift” to describe the way that groups often make decisions that are much more extreme—either much riskier or much more conservative—than their members would choose on average if they made the decision independently. In other words, risk is a social phenomenon. The people around us change the way we perceive and feel about risks in ways that most of us don’t even think about.
What do we believe about how others around us think about risks? Think for a moment about how you’d predict how rich and poor, men and women, and young and old would respond to a particular risk. Research shows that the realities are likely much more nuanced than you think, and that these subtleties matter.
Sometimes, it’s fairly safe to make assumptions. It’s a pretty good bet, for example, that a teenage boy will take more risks than, say, a forty-five-year-old woman. But relying too heavily on stereotypes can be dangerous. They can lead you to make the wrong choices in who to hire or where to invest. Stereotypes that others buy into and that we may not even realize we hold about ourselves can encourage too much or too little risk.
Teenagers are notorious for taking ill-considered risks. They combine a sense of invincibility with a lack of life experience in things that could go wrong. Plus, peer pressure is intense, with risky shift more likely to lead to even riskier behavior rather than producing more conservative decisions. Typically, as they mature, they tend to moderate their risk behaviors. What they bring into adulthood depends on what happened when they took risks as teenagers.
As we get older, we may become more comfortable with some risks, both because we have more knowledge and because, as our inevitable mortality approaches, we have less to lose and less to fear. Retired people control their time much more than they did when working for a company—even running their own company—and a feeling of control helps people to be more comfortable with risks. And after a lifetime of (hopefully) earning and investing, older generations often have a much bigger cushion in case something goes wrong.
Geographies of Risk
THE COVID-19 PANDEMIC has shown in stark relief the difference among states’ risk responses: How they prepare ahead of time, how seriously they take it once a possible danger becomes a clear and present one, and how quickly and aggressively they act. But why? What are the root causes of these differences, both among and within places with very different histories, cultural backgrounds, political systems, and demographic and geographic realities?
Many observers have noted how many of the most effective responses have been those managed by women leaders, both in the United States and around the world. Women tend to be more risk aware and often make better decisions in crises. There may be a chicken-versus-egg phenomenon here: Perhaps the kinds of countries that choose women leaders also are more risk aware and open to alternative approaches.
“What if countries led by women are managing the pandemic more effectively not because they are women, but because the election of women is a reflection of societies where there is a greater presence of women in many positions of power, in all sectors?” Louise Champoux-Paillé and Anne-Marie Croteau asked in an article in The Conversation. “Greater involvement of women results in a broader perspective on the crisis, and paves the way for the deployment of richer and more complete solutions than if they had been imagined by a homogeneous group.”
Each nation’s habits and experiences with different kinds of risks made a difference, too, for better and for worse. Global surveys show wide differences of opinion around the world about what the biggest risks are, how knowledgeable people are about those risks and how closely their perceptions match reality, how much power citizens and governments have to deal with known dangers, and how much control people believe that they and their leaders have over the perils they face.
Risk and Organizational Culture
Risk dynamics vary across types of organizations. Family-run businesses balance a very different set of shareholder interests than public companies might. Generational differences within families will come into play and need to be resolved. A large “legacy” firm that has always done things a certain way likely is more risk-averse in unhealthy ways that paradoxically create more risk by stifling innovation. By contrast, a start-up firm—particularly one in a “hot” industry that has attracted a lot of capital—may be innovative and creative but dangerously risk-seeking.
Two companies of similar sizes and at comparable stages in their development may have very different risk cultures rooted in their CEO and board’s attitudes, the decisions that they have made about acceptable risk behaviors, their organizational structures, the processes for assessing and managing risks, and the framework for determining acceptable risk. In mergers and acquisitions, failing to recognize risk culture can doom the new organization.
The bigger companies get, the more convoluted internal risk dynamics get, particularly when they buy or merge with each other, and even more so when they are of different sizes or maturities. When a legacy financial services firm, full of change-averse Baby Boomers, buys a fintech start-up full of raring-to-go Gen Zs and millennials, keeping the start-up as a separate division with its own culture may be a much better option than trying to get the start-up’s culture to conform to that of the bigger firm that bought it. A big corporation whose employees are not as comfortable with change and uncertainty could very easily stifle the innovation and creativity that are essential to the value of the start-up it buys. Indeed, it may be best to reconsider whether or not such a merger makes sense at all
Reshaping Your Risk Relationship
Every decision you make involves weighing risks, even if you might not think of them that way. Even if it’s as mundane as taking a chance on a new recipe for dinner, every time you use your imagination and step out of your comfort zone, the more you use a risk lens to weigh the dilemmas you face, the less daunting they will become. Once you realize you take risks every day, you get better at approaching each one decisively. Recognize and reward yourself for that. Meanwhile, you’ll become savvier and more confident about stepping up when it comes to bigger and bigger risks.
Take a moment to think about the risk fingerprints of the people around you and ask how their perspectives affect your risk relationship. Your peers matter. Make it a habit of doing a temperature check from time to time to be sure that the risk habits and attitudes of the people around you support good risk decisions and behaviors—and make sure you spend more time with the people who lift you up instead of drag you down.
Good habits include making sure your actions and relationships are consistent with your values and motivation; looking at your decisions through a risk lens; making sure you get out of your comfort zone from time to time; and creating a risk portfolio so that you know you have safety in some parts of your life that give you the freedom to take the right risks even when they feel uncomfortable. The people around you can help you to reinforce these habits.
Ultimately, joining or creating a supportive group reduces the risks in your life because your circle gives you a chance to avoid blundering forward blindly or falling in with a crowd who leads you to take the kind of risks you don’t want or need; to connect you to resources that can support you; and ultimately, to get better at navigating an uncertain world.