Managerial Perspectives on Risk and Risk Taking

This paper explores the relation between decision theoretic conceptions of risk and the conceptions held by executives. It considers recent studies of risk attitudes and behavior among managers against the background of conceptions of risk derived from theories of choice. We conclude that managers take risks and exhibit risk preferences, but the processes that generate those observables are somewhat removed from the classical processes of choosing from among alternative actions in terms of the mean (expected value) and variance (risk) of the probability distributions over possible outcomes. We identify three major ways in which the conceptions of risk and risk taking held by these managers lead to orientations to risk that are different from what might be expected from a decision theory perspective: Managers are quite insensitive to estimates of the probabilities of possible outcomes; their decisions are particularly affected by the way their attention is focused on critical performance targets; and they make a sharp distinction between taking risks and gambling. These differences, along with closely related observations drawn from other studies of individual and organizational choice, indicate that the behavioral phenomenon of risk taking in organizational settings will be imperfectly understood within a classical conception of risk.