Risk Taking: A Psychologist’s Perspective Richard Kwiatkowski Steve Macaulay As the economic crisis has unfolded, there has been more and more attention paid to decision making – particularly at the top – and risk taking. Now as you might imagine, psychologists have got quite a lot to say about this, so we are fortunate to be in the studio today with Richard Kwiatkowski. Now Richard, what have psychologists got to say about this area? I imagine one of the first things you would say is this isn’t an entirely rational process. Richard Kwiatkowski Absolutely; the whole notion of an economic man model, where people are rational processors of perfect market information is clearly flawed. People just aren’t like that; groups, emotions, contexts all play a part in decision making and in risk taking behaviour. Steve Macaulay Of course one of the worries about this is that if the decisions aren’t rational, we have got millions of pounds and dollars at stake and millions of people’s lives. Richard Kwiatkowski And at the end of the day there are people – or groups of people – who are making these decisions. And so we need to be very aware of the whole idea of group think and of context and how people construct meaning. And how difficult it is for people to step outside those contexts to make decisions that actually make sense in the broader context. Steve Macaulay Now let’s unpack some of these words. One of the first things that we need to look at is what have observations have told us about how people take decisions and the spectrum of processes that go on there. Richard Kwiatkowski In terms of things like game theory – and again, researchers were looking at this in the 1970s, so it is not news – people will minimise their losses if they feel they have little to lose and maximise their winnings. So there are different ways in which people approach the whole area of decision making and behaviour. In addition, some people are more risk averse and some people are actually thrill seeking; so people will enjoy gambling, will enjoy driving fast cars, will get an adrenaline buzz – if you like, for want of another phrase – from indulging in behaviour that is on the edge. Knowledge Interchange Online© Cranfield University December 2009 1 Richard Kwiatkowski
Steve Macaulay So how does that play out in practice, then? We have got a board of a big bank, for example, what might you expect of those people given those sorts of dimensions? Richard Kwiatkowski One of the things that happen in any organisation is the danger of group think; we are all in this together, we all get to know each other, we all start constructing meanings in the same way. So that behaviours that on the outside may seem strange or odd or risky, dangerous even, amongst ourselves we think, ok, well that is just another step. It becomes easy to make that step because our references are internal and that danger of group think is always there. Steve Macaulay So you start to think this is OK, when it actually isn’t OK, because you have got a very supportive group of people who all seem to be saying it is OK? Richard Kwiatkowski Absolutely; and this is where a lot of the criticism of non‐
executive directors comes from, because the hope is that people coming in from the outside will be able to say hang on, that is not quite right; or why are you doing this; or question the people who have the authority and who are making those decisions. As we know, that doesn’t always happen. Steve Macaulay What is worrying me is that is, if you like, the academic perspective – there have been lots of studies done on these things – but what should the practising manager pay attention to? Richard Kwiatkowski I guess one of the key things here is awareness; to actually notice what is obvious. But in the busyness of day to day tasks and having to get things done, it is very easy to operate within a particular context that is understood by that organisation. You need to be aware of your own biases, your own prejudices. You need to be aware of what your decision making process actually is and how rational it is; and how connected to reality or not it is. Also to notice that your decision making is going to be clouded by emotions. It is not going to be rational and particularly in the context that we are in at the moment, just to notice that your anxiety levels may be interfering with just how good you are at making decisions. © Cranfield University December 2009 2 Richard Kwiatkowski
Steve Macaulay So, if you were to leave us with one message from a psychologist’s perspective, as opposed to an economist’s perspective or a business guru perspective, what would you say? Richard Kwiatkowski I guess the thing that I would say, which sounds very trite, is remember that you are a human being with finite information processing capacity, without access to all the possible market information and you are trying to make a decision that is good enough, to be mindful of the factors that we have talked about and to allow yourself to make that decision in as good a way as possible; to get external reference, to get benchmarking, to get a sense of what is actually happening. And if you are feeling anxious, or if you are feeling excited or aroused, to perhaps delay that decision until a time when you are more in touch with reality. Steve Macaulay © Cranfield University Richard, thank you. December 2009 3