Thinking of Risk
As a researcher of risk and risk taking capacity. I am always intrigued by studies on why as humans we make the choices we make, what leads us to those choices, and are we willing to take a risk in our choice making. Daniel Kahneman in his book Thinking Fast and Slow dedicates an entire section to choices and Chapter 31 specifically to risk. There were a few things I gleaned from his work that help to understand the complexities of risk for individuals and organizations.
Kahneman’s focus in the chapter on risk is centered around financial risk taking, but it is applicable to risk taking in our lives and as leaders. He identifies 2 biases that exist when thinking through risk, “the exaggerated optimism of the planning fallacy and the exaggerated caution induced by loss aversion”. His proposal is to have a “Risk Policy”, to have a set of pre determined processes that help you process through the choice at hand. His proposal is that we have a plan before we are faced with a risky decision. He also talks about an outsider view as being helpful in evaluating and thinking through risk. As individuals this can be hard to accomplish when we are stuck in a risk aversion mindset. When we try to avoid the discomfort felt in the uncertainty of risk we often can’t make a “policy” or plan because we don’t have the experience to know what process might be helpful. This leads to the place many find themselves in, a place of being stuck in their fear of risk taking. The fear of the unknown takes hold and maintaining the status quo, the safe zone, becomes essential for survival.
This state of status quo is not limited to the individual experience. Leaders of organizations face this aversion to risk and maintenance of the status quo in their organizations too. Kahneman discusses in a video interview about what he calls the status quo bias in relationship to organizational change. The status quo bias exists at the individual level and in the organization. “Any Change or reform will have winners and losers. The losers will fight a lot harder to keep what they have than the winners will fight for the change. This makes reform quite difficult” Kahneman also points out that leaders who are reformers are looking at the long term and can see the anticipated improvements, while inside the organization there are individuals who can see that some of them will loose and some of them will win which leads to the risk aversion. So, as leaders of organizations casting vision for reform, understanding this risk aversion becomes key to successful reform and change implementation.
What does this mean for us as individual and as leaders, how do we engage with risk when our human condition wants to avoid the unknown and the potential losses that risks hold?
Simply put, we have to have positive risk experiences that can help us develop understanding, habits, even policies around risk. So that when faced with a risk decision we have the experience and thought process to work through the risk in a healthy way and can lead our organizations through a needed risk while balancing the needs of the individuals within.
 Daniel Kahneman, Thinking, Fast and Slow (New York, NY: Farrar, Straus, and Giroux, 2011), 340.
Daniel Kahneman: “Loss Aversion & Status Quo Bias in Change Management” https://www.youtube.com/watch?v=llPu94GDV74
9 responses to “Thinking of Risk”
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Sara – I thought of you when reading Kahneman’s sections about risk! I’m so glad you chose to write about it for your blog. I am especially thankful for your thoughts about organization change and risk because we are going through a great deal of that at Messiah right now. Your insights reminded me to be patient with those who are more risk-avoidant and to help them see the larger picture rather than just the cost associated with change. Thank you!
Laura- Thank you for your reflection! I really found the insight about Organizational change helpful too. To think about the reformers, the change agents, as the long range visionaries that they are it makes sense why change would be so hard in an organization when the individuals will have their own issues around the risk of change and the two will be in conflict with each other. This helped me to understand why change in a church feels like turning the Titanic… it is quite literally the turning of every part of the organization and there is resistance or even as Friedman puts it sabotage that happens in response to the fear and risk aversion. As leaders this makes our role in understanding risk and our individual responses to it critical for the health and outcomes of the organizations we lead.
You are incredible person with an investigative thought process. I appreciate you looking at both sides of thinking fast and slow. From your blog post, it is evident that you are a critical thinker.
In my ministry life, I have relied so much on prayer and the gift of faith that I am very hesitant to do anything without the spirits leading. Often, I just wait until I have to make a decision. In the past, emotional decisions have come at a great price, mainly my own personal time. I have appreciated your posts and how you capture the essence of the author and share it in a fresh perspective with us.
Your analysis of winners and losers in Kahneman reminds me of a book I read in Grad School. The author stated that any change, whether positive or negative, brings about a sense of loss and grief. Our church moved to a new property a number of years ago. While this was necessary for growth and a positive thing, we also had to navigate the resistance and the grief of the congregation. What are some practical ways for helping people navigate the loss or grief associated with risk or change?
Thank you for your question. I think the most practical thing as leaders we can do to navigate the grief of change is to listen to those who are grieving, they to hear them and then encourage them. When we identify our fears sometimes they can be less scary. We have to let the process play out while not allowing ourselves to get caught up in the cycle.
Practice makes perfect! I really looked your analogy and feedback on Kahnemans book.
What is something that you have learned through experience of your new leadership position?
I have learned that I have no idea what I’m doing in my new context. Seriously though, I have learned that I’m still learning, still growing, and still need my own mentorship support. I don’t think we are ever as fully prepared for a transition as we hope we are and there is still growth needed on the new journey.
Your comment about the difficulty of building a risk policy can be hard while stuck in a risk aversion mindset was a good critique of Kahneman’s risk policy.
Also, applying the concepts of Thinking, Fast and Slow to leadership and to individuals was helpful. I didn’t think the author made those connections obvious from reading the book.
Thanks for your comments. I think you’re right in that the author doesn’t make clear some of the connections. I believe that leadership is about pulling from many different perspectives, it makes leaders more empathic, more real, and more versatile. Some ideas will fit in a context and others won’t but to have a diversity of tools and knowledge I believe makes for a well rounded leader.