Risk Taking

Risk Taking: A Managerial Perspective

Zur Shapira
Copyright Date: 1995
Published by: Russell Sage Foundation
Pages: 192
https://www.jstor.org/stable/10.7758/9781610444927
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  • Book Info
    Risk Taking
    Book Description:

    Classical economic theory assumes that people in risk situations follow a course of action based on a rational, consistent assessment of likely outcomes. But as Zur Shapira demonstrates inRisk Taking, corporate managers consistently stray from the prescribed path into far more subjective territory.Risk Takingoffers a critical assessment of the relationship between theory and action in managerial decision making.

    Shapira offers a definitive account of the classical conception of risky decision making, which derives behavioral prescriptions from a calculation of both the value and the likelihood of possible outcomes. He then demonstrates how theories in this vein have been historically at odds with empirical observations.Risk Takingreports the results of an extensive survey of seven hundred managers that probed their attitudes and beliefs about risk and examined how they had actually made decisions in the face of uncertainty. The picture that emerges is of a dynamic, flexible process in which each manager's personal expertise and perceptions play profound roles.

    Managerial strategies are continually modified to suit changing circumstances. Rather than formulating probability estimates, executives create potential scenarios based not only on the possible outcomes but also on the many arbitrary factors inherent in their own situations. As Shapira notes, risk taking propensities vary among managers, and the need to maintain control and avoid particularly dangerous results exercises a powerful influence. Shapira also examines the impact of organizational structure, long-term management objectives, and incentives on decision making.

    With perceptive observations of the cognitive, emotional, and organizational dimensions of corporate decision making, Risk Taking propels the study of managerial risk behavior into new directions. This volume signals the way toward improving managerial decision making by revealing the need for more inclusive choice models that augment classical theory with vital behavioral observations.

    eISBN: 978-1-61044-492-7
    Subjects: Business, Management & Organizational Behavior, Sociology

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. LIST OF TABLES, FIGURES, AND APPENDIXES
    (pp. ix-x)
  4. PREFACE AND ACKNOWLEDGMENTS
    (pp. xi-xiv)
  5. Part 1 RISK IN MANAGERIAL DECISION MAKING
    • Chapter 1 THE ROLE OF RISK IN DECISION MAKING
      (pp. 3-18)

      The increasing frequency with which the termriskappears in both the scientific and the popular publications is an indication of its importance in the public eye. In 1993 alone there were over 100 articles in theNew York Timeswhose title included the wordrisk. For instance, a recent article entitled “Hidden Rules Often Distort Ideas of Risk” (Goleman, 1994) reviewed research by psychologists on the ranking of different activities and technologies in terms of their riskiness, including sports activities, food ingredients, and X rays and nuclear power. It appears that the public is preoccupied with the gauging of...

    • Chapter 2 CHARACTERISTICS OF RISK AND RISK TAKING
      (pp. 19-28)

      In Chapter 1 the expected value criterion was introduced as a rule for risky choice. There are, of course, other criteria for choosing among risky alternatives, although the criterion of expected value has attributes that make it rather attractive. What does a person do if two alternatives have the same expected value? Consider the game where someone could choose between definitely receiving $5 or a flip of a coin that would get her $10 or nothing. Suppose that, in addition to the previous game, there is another game where the outcomes of the toss of a fair coin are $7...

  6. Part 2 MANAGERIAL PERSPECTIVES ON RISK TAKING:: AN EMPIRICAL STUDY
    • Chapter 3 THE STUDY: METHODS AND PARTICIPANTS
      (pp. 31-42)

      Proponents of the rational model of choice behavior tend to dismiss evidence collected by psychologists in experimental settings. They argue that such settings are artificial and that subjects’ behavior can in no way reflect their behavior in actual settings, with real risks and incentives. There are clear advantages to running experiments, but it must be admitted that they lack on generalizability. One of the major criticisms of the classical approach is that risk taking is context dependent (March and Shapira, 1987). Context in this respect is the individual’s focus of attention; focusing on survival or aspiration level may lead to...

    • Chapter 4 THE DEFINITION OF RISK
      (pp. 43-53)

      The most common definition of risk in decision theory is the variance of the probability distribution of outcomes. The managers who participated in this study saw risk in ways that appear to be different from the definition of risk in decision theory. They showed very little inclination to equate the risk of an alternative with the variance of the probability distribution of outcomes that might follow its choice. Four aspects characterize the way managers defined risk. First, they referred primarily to the downside risk. Second, they attended more to the magnitude of possible loss than to its probability. Third, they...

    • Chapter 5 ATTITUDES TOWARD RISK
      (pp. 54-71)

      It is widely accepted in the classical literature on risk taking that most people are risk averse. Further, a major tenet of the classical approach to risk taking is that risk and return are positively correlated. In this chapter, managers’ attitudes toward risk taking are described as they are embedded in the context of life in organizations.

      Risk taking tendencies of managers vary across contexts. Among the managers interviewed, the variation across individuals is seen as resulting from incentives and experience. In keeping with much of the literature, managers thought that some people were more risk averse than others, that...

    • Chapter 6 DEALING WITH RISK
      (pp. 72-84)

      The classical approach to risk taking emphasizes the analytical calculation of risk estimates. It leads to a point where, based on calculations, risky options are either accepted or rejected. If risks are accepted, there is nothing that the risk bearer can do after the decision has been taken. In this sense risk taking is properly described by the gambling metaphor. In gambling there is no way for the gambler to affect the parameters of the gamble. Apparently, managers do not see risk taking in the same way.

      Other studies of managers (Cyert and March, 1963) concluded that business managers avoid...

  7. Part 3 IMPLICATIONS FOR DECISION MAKING
    • Chapter 7 COGNITIVE ASPECTS OF RISK TAKING
      (pp. 87-105)

      In the classical theory of choice, risk is defined as the variance of the distribution of the choice-potential outcomes. The notion of volatility is central to the analysis of financial markets. The Dow Jones Industrials Index fluctuates up and down, and its movements are considered an indication of risk. The other measure of risk used in financial theory is the beta coefficient as proposed in the capital asset pricing model (Sharpe, 1964). It measures the degree of volatility of a particular stock or portfolio relative to the market portfolio. This volatility is calledsystematic risk. The residual fluctuations in the...

    • Chapter 8 INCENTIVES AND RISK TAKING
      (pp. 106-119)

      The managers in this study singled out risk taking as the most important aspect in organizational decision making. Further, most of them complained that there was no coherent policy regarding the encouragement of risk taking in their organizations. If a set of rules existed, they said, these only led to inhibiting risk taking. Thus, when asked what advice they would give a new manager about taking risk, they came up with such things as “arrange for a blanket,” “let others participate in your decisions,” and “don’t take risks.” There appears to be some conflict in the managers’ statements between the...

    • Chapter 9 ON THE PROSPECTS FOR IMPROVING MANAGERIAL RISK TAKING
      (pp. 120-132)

      In the previous two chapters the cognitive and motivational aspects of managerial risk taking were analyzed. The cognitive characteristics include insensitivity to probability estimates, the tendency to rely on the amounts to be lost, and the tendency to evaluate risk by focusing on critical performance targets. Consequently, the gambling metaphor appears as an inadequate description of managerial risk taking. The motivational aspect pertains to the incentives attached to success and failure. The preoccupation of managers with the ramifications of decisions and the responsibility for failure leads them to try to exert control and use their skills to restructure decision problems...

  8. Part 4 EPILOGUE
    • EPILOGUE
      (pp. 135-137)

      The managers who participated in this study differed on many dimensions in terms of their personal characteristics, their experience, and their domains of activity. However, they all shared one thing in common: They were all successful managers who held positions in organizations. Many experienced failure before they participated in the study and most likely experienced failure after that time. But at the time they took part in the study they were, by definition, successful, as attested to by their actual managerial positions.

      It is possible that some of the findings were a reflection of the fact that these managers were...

  9. REFERENCES
    (pp. 138-148)
  10. Appendixes
    (pp. 149-164)
  11. INDEX
    (pp. 165-174)