The High Price of Risk Aversion

Bright sunrise - croppedIn a recent column, the Wall Street Journal’s chief economics commentator Greg Ip decried the cost of risk aversion.  He presents a convincing case that risk aversion by corporate leaders is reducing investment which leads to reduced productivity and wages.

Risk Aversion charts

He goes on to make the point that resources that should be invested in new technologies and products are instead being used to fund mergers and acquisitions, buy back shares, and pay dividends. Ip asserts that the impact goes beyond the future growth prospects of the companies

These executive are paid to lead. The resulting lower productivity and wages leads to “growing worker dissatisfaction and political upheaval.”

Square in the cross hairs of this strategy is innovation which Ip artfully attributes to efficiently and creatively combining capital and labor. The impact of suppressing innovation is profound.  Ip references New York University economist Paul Romer’s work in which he makes a fascinating observation:

Unlike a machine or a worker, an idea, once conceived, can be reproduced and shared endlessly for free. The determinant of growth then is both how many ideas a society creates, and how quickly and efficiently they are distributed.

Contemplate how many valuable ideas have not yet surfaces due to excessive risk aversion.

Why are business decision-makers taking the more comfortable but ultimately less rewarding path? Beyond basic human nature that cherishes safety, Ip identifies a short-team mindset, the demands of activist investors, excessive government regulation and the challenge of getting sufficient returns on investments in technology.

Who is doing it right? Who is allocating capital well so they do not suppress the future growth if the companies they have been selected to lead?  Today, it is very hard to tell.  A few years from now, it will be apparent.  That will be when the bill for excessive risk aversion comes due.  And in many cases, the executives who ran up the bill will be nowhere to be found.

 

But We Really are Afraid!

Fear - cropped

Contemplate this statement for a moment:

“We cannot respond [to threats or risks or change] with pure emotion, but leaders can’t omit emotions entirely.  If only because people need validation of their legitimate fear and anger before they will listen to arguments for measured action.”

While this was written in reference to political leaders responding to threats from terrorism, it offers interesting insights about leading organizations through change and innovation. These words, slightly paraphrased, were written by Washington Post editorial writer Charles Lane.  The bracketed phrase is my addition.

Change is rarely welcomed or well-received. I have long contended that people ascend to leadership positions within organizations in part because they have superior risk-taking talents.  Part of utilizing those talents is helping those they lead to move past their limiting fears – to embrace the changes the leaders realize are unavoidable.

It is easy to say that taking risks well requires removing the emotion from the process and being more empirical. And you would be right.  But Lane provides us with a valuable insight.  You will be well-served to acknowledge and honor the fears and concerns of your team before moving forward with analyzing and deciding.

Failure = Success

Pizza v2, croppedI have had an article on my website for a many years called “Seeking Initiative and Innovation?  Reward Failure!”  The title is intentionally provocative and counter-intuitive.  The core message is that you will not unleash organizational courage unless you openly and genuinely accept negative outcomes along with the positive ones.

Well, I just saw a TV ad by Domino’s Pizza called “Failure is an Option.”  Yahoo!  Exactly.  They focus on their product development process and the need to accept failures in order to get the successes.

Here are a few of the lines from the ad:

>>  “We know that not everything is going to work,” Andy Wetzel, Domino’s Product Innovation

>>  “If we gave up after every mistake, we would not come up with something new,” Tate Dillow, Domino’s Chicken Chef

>>  “In order to get better, in order to move ahead, you are going to make mistakes” and “We cannot be afraid to fail.  It sounds crazy, but it’s who we are,” Scott Hinshaw, Domino’s Executive Vice President Operations

Yea Domino’s.  They get it.  And the ad suggests they are truly incorporating the “failure is an option” philosophy into their culture.  I predict that along with the occasional setbacks Domino’s will enjoy new successes and product innovations.

The ad can be viewed at:  https://www.youtube.com/watch?v=-NPqOOErP5I

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Encourage Disobedience

Download-Button v2Here are the first two sentences in a recent article that got my attention:

“Want to be more competitive? Then empower your most technologically disobedient employees.”

The core message is that employees want to do their job and they will seek the tools to do so.  If the corporate Information Technology (IT) department does not provide them with what they need, the will find the applications they need on their own even if it means paying for them.  The proof?  According to research conducted by Frost & Sullivan referenced in the article “80% of people working for organizations with more than 1,000 employees go around the IT department and use (or even buy) software.”  The practice is referred to as “Shadow IT.”

The idea is similar to my admonition to achieve innovation by accepting failures, because you won’t get one without some of the other.  Are there risks?  Of course.  But as the article concludes, “firms concerned about the security issues of shadow IT are missing the point; the bigger risk is not embracing it in the first place.”

The article is titled “Let Staff Go Rogue on Tech.”  It was written by Christopher Mims and is available on the website of the Wall Street Journal.

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Overcome Resistance – Have an Outsider Deliver Your Idea

outsider v2, croppedThe process of innovation requires selling ideas and the change they invite.  Since most people are change adverse, knowing how to sell your ideas can make the difference between success and failure.

There was in interesting report on National Public Radio’s Morning Edition that can offer us some suggestions.  The core insight as it relates to selling ideas is that they are seen as more credible when they are presented by an outsider or someone that is less familiar to the decision-makers.

Does it make sense that the exact same idea would be more valued if it is presented by someone outside your organization as opposed to you?  No.  Is it an unavoidable part of human nature.  Yes?

And in reality, this is not a new concept.  A well known Bible verse tells us that “a prophet is honored everywhere excelogopt in his own hometown and among his relatives and his own family.”

So what does this mean to you?  Consider having some of your more threatening or radical ideas delivered by outsiders or at least people who are not as familiar to the decision-makers.  You will have to put your ego in your pocket and bite your tongue as you see your idea delivered by others.  But the goal is to make a difference and that may just be what is required.

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A transcript of the NPR report titled “Why We Miss Creative Ideas That Are Right Under Our Noses” is available at:

http://www.npr.org/2014/02/26/282836487/why-we-miss-creative-ideas-that-are-right-under-our-noses

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Risk Fascinates

tight_rope_walkerOne of the defining characteristics of risk is that if fascinates us.  In part because it is powerful and in part because it can be frightening.  It attracts us and repels us at the same time.

A new novel by Christopher Reich called “The Prince of Risk” was just released.  It is selling well.  No doubt the title and the topic bPrince-of-Risk-Official copyoth draw readers.  The lead character is described and a “fearless New York hedge fund gunslinger.”  Whether you are driven by a desire to see the fellow take massive risks successfully or to suffer from his hubris matters not.  The fact is that risk fascinates us for a multitude of reasons.

The Risk Overhang – Which Can Lead to the Risk Hangover

balanced-rocksCorporate, organizational and personal risk profiles are dynamic and situational.  Dynamic in that they change often.  By the nature of organizations having a more gradual decision-making process than individuals, their risk profile changes more gradually.  Individuals, on the other hand, may change their risk-profile much more often based on successes, set-backs, access to capital, financial security – or lack of it – and countless other variables.

Organizations are often overly risk-seeking in an upswing and overly risk-averse in a downswing.  Call it the risk overhang, which can lead to the risk hangover.  It is a function of excess – a risk posture that is no longer in alignment with the business and economic environment.  It overhangs the change in conditions.

It is all a matter of balance – or lack of it.  A successful risk posture always is.

The Risk Tension

Trail Ridge, croppedThere is an innate tension when it comes to risk – between the knowledge that we need to take thoughtful risks and the desire not to.  These two elements are the basis for the logo for the Research Institute for Risk Intelligence.

Logo for FacebookThe blue and the purple are offset at juxtaposition but also complement one another.  When joined together they create an image that speaks to continuity and by virtue of the Möbius nature of the design make reference to the concept of infinity.

The intent it to represent all that can be achieved when we allow the tension about risking to recede and adeptly combine the two elements of challenge and caution.

Subjectivity in Risk Assessment

Woman-Risk-Taking, croppedIn my book The Power of Risk (Maxwell Press), I discuss how we see a risk as less threatening if we see the value the potential rewards of the risk.  By Power cover - 2 inchcontrast, to the extent we do not value the potential rewards of a risk, we tend to see the risk as more threatening.

It is interesting to see that Baruch Fischhoff and John Kadvany in their book Risk, A Very Short Introduction (Oxford University Press) cite research that shows that both individuals and societies accept greater risks from voluntary hazards than from involuntary ones.

Similar concept.

Common Perceptions of Risk

Risk takerConsider the definition of risk from the Merriam-Webster Online Dictionary:

risk

1: possibility of loss or injuryHighlighting Rewards Versus Risk

2: someone or something that creates or suggests a hazard

3 a: the chance of loss or the perils to the subject matter of an insurance contract; also: the degree of probability of such loss b: a person or thing that is a specified hazard to an insurer c: an insurance hazard from a specified cause or source

4: the chance that an investment (as a stock or commodity) will lose value

Is it any wonder that many of us have a conflicted relationship with risk and risk-taking?  Look at these definitions.  They are uniformly negative.  The thought that a risk could have a positive outcome is entirely absent.

  • Couldn’t the first definition read:  possibility of loss, injury, success or accomplishment and indeed be accurate?
  • Wouldn’t the fourth definition be more accurate if it read:  the chance that an investment (as a stock or commodity) will lose or gain value?  Certainly an investor, entrepreneur or company does not put capital at risk unless there is a reasonable chance of an increase in value.

This definition illustrates the common societal bias against taking risks – even thoughtful, intelligent ones.

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