Tony Horava, AUL (Collections)
University of Ottawa
OLA SuperConference
Jan. 28, 2015
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Organizational risk
Prospect Theory
Major principles
Implications for risk assessment
Implications for academic libraries
Conclusion
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“Society values risk taking but not gambling, and what is
meant by gambling is risk taking that turns out badly. From
the point of view of managers and a society dedicated to good
management, the problem is to develop and maintain
managerial reputations for taking "good" (i.e., ultimately
successful) risks and avoiding "bad" (i.e., ultimately
unsuccessful) risks, in the face of (possibly inherent)
uncertainties about which are which.”
James G. March and Zur Shapira, “Managerial Perspectives on
Taking,”
Management Science 33, no. 11 (1987): 1413.
Risk and Risk
The ARL 2030 Scenarios :
 A sustained reflection upon the risks and opportunities for
libraries, based on four possible scenarios. It is up to each
library to assess the probability of any scenario occurring
 “Organizations act on what they know or what they believe
they know to be certain. Many of those certainties are in
actuality uncertainties. Those false certainties become the
basis for an organization’s strategic decision-making. “
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Frames - lenses that filter some things and allow others to
pass through, help us order experience.
Each frame comes with concepts and metaphors for
organizing our understanding of the world, esp organizational
culture
Four frames – Structural; Human resource; Political; Symbolic
Looking at organizations this way can help us assess what is
working and what isn’t – and addressing risk in reframing
Technological -
rapid obsolescence and the hype cycle;
 inadequate or dysfunctional tools;
 lack of interoperability with other systems;
 foreshortened life cycles for development;
 the quality of maintenance and support
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Financial -
the institution’s degree of support of the library;
 the foreign exchange rate;
 Ontario’s and Canada’s economic performance;
 investments made by the institution;
 the global economy & inflation
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Political 
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institutional strategic agendas shifting in direction;
changes in senior administration and therefore shifting loyalties and power
balances;
a range of stakeholders in the academy with different/complementary interests;
Assessment standards and measurement of impacts;
unpredictable directions/pressures for post-secondary education;
new governments with new agendas
Socio-cultural –
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new patron attitudes and preferences in their use of information and devices;
new learning styles based on use of social media and new technologies;
new purposes for using library spaces and collections, such as collaborative work
shifting demographics that can lead to a new mix of the student population;
Mental paradigms affect risk assessment and decision-making in
libraries. The historian of science Thomas Kuhn asserted that a
paradigm is "the entire constellation of beliefs, values, techniques, and
so on shared by the members of a given community.”
- In a library context, this constellation is typically conservative,
reactive, and risk-averse (but changing…)
The importance of process: "The less things are predictable the more
attention you have to pay to the strategy process. Uncertainty has the
effect of moving the key to success from "the optimal strategy" to the
"most skilful strategy process.” Kees van van der Heijden, Scenarios:
The Art of Strategic Conversation vii-viii.
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“Prospect Theory: An Analysis of Decision under Risk”
Econometrica 1979 47(2): 263-291.
http://www.princeton.edu/~kahneman/docs/Publications/pro
spect_theory.pdf
The authors Daniel Kahneman and Amos Tversky, awarded
the Nobel Prize for Economics in 2002
Originally applied to behavioral economics; then applied to
other contexts
Has led to a more nuanced understanding of how we grapple
with uncertainty and make decisions in the face of risk.
Probability weighting
Reference dependence;
Loss aversion;
Diminishing sensitivity;
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The role of probability weighting in decision-making is quite
crucial.
Typically, “the weighting function overweights low
probabilities and underweight high probabilities.” Generally
speaking, people are overconfident about expected outcomes
related to risk, and make decisions with particular biases
Interview with Daniel Kahneman:
◦ “People systematically violate the predictions of expected utility
theory.”
◦ “The emotional tail wags the rational dog”
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People derive utility from gains and losses, measured relative
to some reference point, rather than from any absolute
standard for economic well-being.
All gains and losses are therefore relative; no one size fits all
Think of your Collections budget, or Operations budget, or
staff complement, as the reference point for your library’s
experience in any given year – versus previous years.
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Loss aversion - people are much more sensitive to losses—
even small losses—than to gains of the same magnitude, eg
“people tend to be risk averse over moderate probability
gains: they typically prefer a certain gain of $500 to a 50
percent chance of winning $1,000.”
People hate losing much more than they love winning (by a
factor of about 2-3 to 1, based on Kahneman and Tversky’s
research)
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Replacing a $100 gain (or loss) with a $200 gain (or loss) has
a significant utility impact, replacing a $1,000 gain (or loss)
with a $1,100 gain (or loss) has a smaller impact.
As numbers scale upward – think of budgets or collectionsthis implies that we become less sensitive to the impact that
variations from expectations can produce
A serial that costs $100 this year and jumps to $500 next
year is seen as a dramatic increase, versus a serial that costs
$5,000 this year and $5,400 next year. Scale of perception is
different.
Kahneman and Tversky asked subjects to choose between the
following two options:
A) a 5% chance to win a three-week trip to England, France and Italy;
or
B) a 10% chance to win a one week trip to England.
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67% of participants chose Option A, and 33% chose B, even though
the odds are in favour of B.
In a second test, subjects were asked to choose between the
following two options:
A) a 20% chance to win a gamble for $4,000; or
B) a 25% chance to win a gamble for $3,000
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Result: 65% of participants chose Option A, and only 35%
chose B, even though the odds are in favour of B.
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Collection strategies, eg the possible end of the Big Deal
Funding challenges/existential threats
The galloping horse of technology
Transformation of services
Contingencies such as natural disasters
Collaborative projects
Staffing shortfalls
Etc....
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Can these principles be useful in our mental toolkit for
decision-making, ie in a climate where increasingly difficult
choices will need to be made (coming to terms with losses or
tradeoffs)
Prospect Theory can make us more aware of our default ways
of understanding risk
It speaks to the importance of making decisions using
evidence-based approaches, both for short and long term
planning
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Risk is baked in to the academic world, and increasing in intensity with each
year
The more aware we are of risk dynamics, the better equipped we are with
dealing with tough constraints and choices.
Reviewing the full spectrum of high and low risk events & factors, in relation
to our understanding of probability and contingency, is valuable.
Prospect Theory can provide us with some insights on human decisionmaking under risk. Can this transfer to our world and be useful?
“Risk-taking in Academic Libraries: The Implications of Prospect Theory”
Library Leadership & Management 28(2) 2014.
https://journals.tdl.org/llm/index.php/llm/article/view/7055
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Tony Horava
thorava@uottawa.ca
(613) 562-5800 ext 3645