How Do You Perceive Risk?

by Marc Rounsaville on January 10, 2012

Are you risk averse, never take chances? Do you sit on the sidelines and watch others take the plunge? Are you risk seeking, always taking chances? Are you the first one in your group to go bungee jumping? Guess what, you are both. We all are. Risk averse and risk seeking are relative to each other. Almost without fail there is someone that will take a chance we won’t or won’t take a chance we will. It is a personal choice, always. Neither is better or worse than the other. If we ascribe a value to risk seeking or risk aversion it is based upon our own view, our own risk perception not on the cold, hard, impersonal numbers.

It is easy to label a group or individual as one or the other. We have all done it. Think about recreational activities, sky diving or bird watching, surfing big waves or surfing the internet. Each of these carries a certain amount risk which includes the consequences – both good and bad. And the people that participate in these actions are risk averse or risk seeking relative to their own perception of risk. In a business setting we can see industries, groups or individuals within an industry that will accept or reject risks that are different from the risk we might accept. Entrepreneurs generally are seeking more risks than those working for a company and yet both may see themselves as risk takers. Companies and organizations frequently extol the virtues of risk taking, but stop short of defining the level of risk that is acceptable. Whose metric is used to make the call?

Here is a little test. We are going to flip a coin (an honest one that yields the expected results). You have to pay to play, if you win you get $100, if you lose I get to keep your entry fee. I also get to decide if you have paid enough to play. Oh, and by the way, we are only going to play one time. So how much would you pay to play — a dollar, $25, $50? Now imagine we are playing for $10,000. Same rules, same odds the only change is the amount to win. How much would you pay to play now? Was it 100 times more than when playing for a $100? Does the greater potential reward change the amount you would risk?

The probabilities are 50:50 for both games but most people will adjust the amount they would pay based upon what they can afford or how comfortable they feel with the possibility of losing their entry fee. The reasons vary but are always personal.  It is also interesting and important to note the adjustments are most often based on the potential loss and not the potential gain. In this example a person that would pay $25 to play for $100 likely will not pay $2500 to play for $10,000.

A real life example of this occurred on a large forest fire a few years ago. It was late in the season and there was a 95% chance snow would end the fire before it could reach the edge of a town. The fire management team recommended to not engage the fire, in other words, take no action other than monitor the fire. The local administrator responsible for the overall land management was quite animated in his response that the fire must be engaged with maximum effort in other words, put it out now!  In his personalized evaluation the elimination of the fire (risk to the community) was worth the effort (potential consequences).

Two views of the same risk decision and each manager processing the risk personally, assigning weights or importance to the factors of highest value to them. The fire management team was considering resources assigned and other fires’ needs, the local administrator was considering the potential political impacts of homes and businesses being destroyed. Who was right? In this case both were right. Each processed risk from a their own personal perspective. When debriefed later the labels of risk averse and risk taking were freely applied by both parties. Neither recognized the impact of risk perception on the process of decision making.

When has risk perception impacted your decision making?

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