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Are you risk-averse?
Personally, I am not risk-averse, but I certainly do my best to be risk-aware. This topic came up quite a lot in the past few weeks, especially during my interviews with senior female risk executives for the RiskMasters Podcast. And this got me thinking about what risk perception and what this means in my daily life and for organisation risk culture.
According to Northwestern Mutual’s 2019 Planning & Progress Study,
“the average American “financial risk tolerance” – defined as the comfort level with taking financial risks in order to seek financial returns – is a 4.9 out of 10 (with 1 being ‘very conservative’ and 10 being ‘very aggressive’). Considerably more people fall on the risk-averse end of the scale, with 30% in the 1-3 low-tolerance range vs 14% between 8-10… and this is not limited to finances.”
Growing up, I had to learn to read the room from an early age. This was a matter self-preservation. Afterall, being gay was outlawed in my birth country when I was born. And it still is in many countries. Risk perception seems to be a complex psychological phenomenon that varies significantly among individuals and, from what I have experienced, is influenced by various factors such as personal experiences, cultural background, and societal influences. And this impacts our life in many ways.
What is risk perception?
Risk perception is defined as the ability to identify and evaluate risk associated with hazardous events (Hunter, 2002). Brown and Groeger (1988) theorize that risk perception is comprised of information gathered from the environmental hazards and the operator’s abilities. For example, less experienced operators may not have the ability to efficiently assess hazards and risks. If a pilot lacks an understanding of how weather develops and effects flight, this would likely hinder accurate and effective risk perception (Hunter, 2002).
Risk perceptions are beliefs about potential harm or the possibility of a loss. It is a subjective judgment that people make about the characteristics and severity of a risk.
The degree of risk associated with a given behaviour is generally considered to represent the likelihood and consequences of harmful effects that result from that behaviour. To perceive risk includes evaluations of the probability as well as the consequences of an uncertain outcome. There are three dimensions of perceived risk – perceived likelihood (the probability that one will be harmed by the hazard), perceived susceptibility (an individual’s constitutional vulnerability to a hazard), and perceived severity (the extent of harm a hazard would cause). Risk perceptions are central to many health behaviour theories…
Source - https://link.springer.com/referenceworkentry/10.1007/978-1-4419-1005-9_866
Influences on Risk Perception
Reading through some researches, it seems that
“individuals' values, beliefs, and attitudes as well as the wider social or cultural values or dispositions strongly influence how risks are perceived or accepted. A better understanding of risks, consequently, will not lead to a uniform response to them.”
Cultural Differences in Risk Perception
Cultural norms and societal structures significantly influence how we perceive and respond to risks. These differences often stem from whether a culture prioritises individual or collective well-being and the availability of economic safety nets.
Collectivist vs. Individualist Cultures
In collectivist cultures, like Japan or India, decisions tend to prioritise group harmony and stability, often avoiding risks that could disrupt relationships. In contrast, individualist cultures, like the U.S. or the U.K., emphasise personal growth and autonomy, making people more comfortable taking risks for individual rewards. For example, a person in a collectivist society might hesitate to pursue a risky career move that could affect their family, while someone in an individualist culture might see it as an opportunity.
Developed vs. Developing Countries
In developed countries, safety nets like healthcare and unemployment benefits encourage higher risk tolerance, such as investing in volatile markets. In developing countries, where such support is limited, people often focus on low-risk options like saving in tangible assets (e.g., gold or land). For example, during COVID-19, developed nations introduced relief measures, while in developing countries, survival took precedence over long-term risks.
Implications for Global Teams
In diverse environments, understanding these cultural variations is crucial. For example, a global team may need to balance risk-averse approaches common in collectivist cultures with the risk-taking mindset of individualist members to make balanced decisions. In that context, risk frameworks and risk management processes must be adapted to enable a nuanced approach to overall risk management
While cultural differences shape how societies perceive risk, individual acceptance of risk varies based on trust, familiarity, and the nature of the risk itself.
Risk perception and risk acceptance
Looking back at my trading days, it always fascinated me to see how, while having access to the same information, we with my colleagues could come up with dramatically different risk assessments of the same situation, especially when it came to potential risks involved.
And realistically, I am still experiencing similar situations 20 years later. I have observed this was particularly acute when it came to vaccination where trust in government seems to, often, be more important than the merit of health protection. This certainly impacted our societal and individual response to COVID.
Research suggests that voluntarily taken, natural, and controllable risks are generally more accepted than imposed, uncontrollable, or human-made risks. The level of familiarity also influences risk acceptance.
Cognitive Biases and Risk Perception
Our perception of risk is deeply influenced by cognitive biases—mental shortcuts that help us process information but often lead to skewed judgments. These biases shape how we evaluate uncertain outcomes, sometimes without us realising it.
Optimism Bias
This bias leads us to overestimate the likelihood of positive outcomes while underestimating potential risks.
Example in Personal Life: Skipping health insurance due to believing "it won’t happen to me" can leave individuals unprepared for emergencies.
Example in Business: Teams launching new products often assume the best-case scenario, neglecting potential delays or budget overruns.
Availability Heuristic
We tend to overestimate risks based on how vivid or recent examples are in our minds.
Example in Personal Life: Fearing flying after a plane crash on the news, despite it being safer than driving.
Example in Business: During COVID-19, organisations overly focused on pandemic risks while neglecting threats like cyberattacks.
Anchoring Bias
Anchoring occurs when the first piece of information heavily influences subsequent judgments.
Example in Personal Life: A car’s initial price becomes a benchmark for what feels like a good deal.
Example in Business: In mergers, initial valuations often anchor perceptions, even if due diligence reveals flaws.
Mitigating Biases
Conducting "premortem" exercises, relying on diverse data, and seeking multiple perspectives can help reduce the influence of these biases. Recognising these tendencies is crucial for better decisions in personal and organisational contexts.
Risk perception in relationship
In my experience when it comes to relationship, differences in risk perception can become a sticky point, often leading to challenges in decision-making and lifestyle choices. When one partner is risk-averse, but not necessarily risk-aware, they may prefer security and stability, avoiding situations with uncertain outcomes, situations they cannot control. This can manifest in financial decisions, career choices, and even in day-to-day activities. Understanding and respecting these differences is crucial for maintaining a healthy relationship.
Financial Decisions: risk-averse partner may prefer saving in low-risk options, while the other might advocate for higher-risk investments like stocks. This difference can create tension if one views the other’s approach as overly cautious or reckless.
Career Choices: One partner might want to leave a stable job for a risky entrepreneurial venture, while the other may worry about financial uncertainty, leading to conflicts over shared priorities.
Day-to-Day Decisions: Risk perception differences even surface in daily activities. For example, one partner may enjoy adventurous vacations, while the other prefers safety and predictability.
Emotional Vulnerability: Risk perception extends to emotional risks too. A risk-averse partner might hesitate to express feelings for fear of rejection, while a risk-tolerant partner may be more open, leading to misunderstandings.
Moving From Conflict to Collaboration: Differences in risk perception can be a strength when balanced. The cautious partner provides stability, while the risk-tolerant partner pushes boundaries. Together, they can create a dynamic that blends security with growth.
Challenging Stereotypes: Are women risk averse?
Women are risk averse!
I heard this statement so many times, including from women. In my experience, many women are risk aware and tend to make risk informed decisions. But that does not make them risk averse. This awareness can be attributed to evolutionary factors and societal expectations among other factors, highlighting the need to challenge stereotypes regarding risk perception.
Conversely, some individuals exhibit risk-unaware behaviour, engaging in activities with insufficient consideration for potential consequences. This could be attributed to factors such as impulsivity, overconfidence, a lack of experience or a lack of mental space to “deal with more”. The latter is particularly acute in business and in personal life during stress situation.
I had first-hand experience of how destructive this could be while growing up. Recognising and addressing these tendencies is crucial for personal development, societal well-being and business sustainability.
Empathy and Risk Awareness
Empathy plays a significant role in how individuals perceive and respond to risks. Empathetic individuals may be more cautious, considering not only the potential impact of risks on themselves but also on others. This heightened awareness of the human factor can contribute to more responsible decision-making and a greater sense of collective responsibility.
In the corporate world, executives' decisions can impact not only their personal lives but also the lives of those in the surrounding communities. Examining the choices of CEOs, particularly in industries with potential environmental risks, reveals insights into how individuals in positions of power perceive and manage risks. For example, would water company CEOs choose to live in the vicinity of their plants, or do they inadvertently push risks onto others?
Risk Perception in Leadership
Leaders play a pivotal role in shaping how risks are perceived and managed within organisations. Their attitudes toward risk set the tone for the organisational culture, influencing how teams assess, respond to, and communicate about potential threats and opportunities.
These insights into how leaders shape risk culture are explored further in the CPD RiskMasters Podcast, where I interview senior executives about their strategies for fostering risk awareness and psychological safety in their teams.
How Leadership Shapes Risk Culture
A leader’s personal risk tolerance often filters down through the organisation. Risk-averse leaders may foster cautious decision-making, encouraging thorough analysis but sometimes discouraging innovation. Conversely, risk-tolerant leaders can inspire bold strategies, but they may inadvertently downplay potential pitfalls.
For example, a CEO who prioritises stability may focus heavily on risk avoidance, creating a culture where employees hesitate to propose unconventional ideas. On the other hand, a leader who embraces calculated risks may empower teams to explore innovative solutions but must ensure these risks are properly assessed to avoid reckless decisions.
The Role of Psychological Safety
Psychological safety—the belief that one can speak up without fear of punishment or ridicule—is critical for effective risk management. Leaders who create a psychologically safe environment enable their teams to surface potential risks, strengthening risk identification capabilities, and share diverse perspectives without hesitation.
For instance, in a psychologically safe team, employees are more likely to flag concerns about a new product’s compliance risks or suggest alternative strategies. Without this safety, risks may go unaddressed, leading to avoidable failures.
When leaders model transparency and encourage open discussions about risk, they cultivate a culture of accountability and trust. This approach fosters better collaboration, helping teams make informed, balanced decisions. This also strengthen overall organisational resilience and enable enhanced business continuity.
Building a Risk-Aware Culture
To shape a culture that balances risk-taking and caution, leaders can:
Model Risk-Informed Decision-Making: Demonstrate how to weigh potential benefits against risks, especially operational risk, howing teams how to approach uncertainty thoughtfully.
Encourage Open Dialogue: Create opportunities for teams to discuss risks and lessons learned from past decisions.
Balance Innovation with Responsibility: Support calculated risk-taking while reinforcing accountability mechanisms to manage downside risks.
Conclusion
Understanding risk perception is not a static pursuit; it evolves, influenced by values, beliefs, and attitudes. Research underscores the divergence in responses to risks, challenging the notion that a comprehensive understanding will yield a uniform reaction. This nuanced approach recognises the subtle interplay of factors shaping our perceptions.
Reflecting on my experiences in trading and the societal response to events like COVID underscores the significance of these perceptions. Voluntarily embraced risks differ starkly from those imposed, highlighting the balance between familiarity, control, and acceptance. Recognising these dynamics is paramount for informed decision-making in various facets of life—whether in personal relationships, organisational leadership, or societal responses to uncertainty.
Ultimately, risk perception is shaped by who we are: our experiences, our culture, our biases, and the environments in which we live and work. By understanding and addressing these influences, we can not only make better decisions but also foster collaboration, empathy, and innovation in the face of uncertainty.
How do you perceive and respond to risks in your life? Whether it’s at home, in your career, or in leadership roles, the journey toward risk awareness starts with asking the right questions—and being open to challenging your assumptions.
Frequently Asked Questions (FAQs)
1. What is risk perception, and why is it important?
Risk perception refers to how individuals identify and evaluate risks based on their beliefs, experiences, and cultural influences. It’s important because it shapes how we make decisions in personal life, relationships, and organisational contexts, often influencing outcomes more than the actual risk itself.
2. How do cultural differences impact risk perception?
Cultural norms significantly affect how risks are perceived. For example, collectivist cultures prioritise group harmony and stability, often leading to more cautious decisions. In contrast, individualist cultures emphasise personal growth and autonomy, encouraging higher risk tolerance.
3. What role do cognitive biases play in risk perception?
Cognitive biases like optimism bias, availability heuristic, and anchoring influence how we perceive and respond to risks. These mental shortcuts can lead to overly optimistic decisions, overestimating certain risks based on recent events, or sticking too closely to initial information.
4. How can I address differences in risk perception in a relationship?
Open communication is key. Discuss your perspectives and underlying concerns with your partner, and look for ways to balance each other’s strengths. For example, a risk-averse partner can bring stability, while a risk-tolerant partner can encourage growth.
5. How can leaders create a positive risk culture in organisations?
Leaders can shape risk culture by fostering psychological safety, encouraging open dialogue about risks, and modeling balanced, risk-informed decision-making. A supportive environment allows teams to raise concerns and explore innovative solutions responsibly.
6. Are women really more risk-averse than men?
Not necessarily. Research and experience suggest that women are often risk-aware, not risk-averse. They tend to make decisions based on a thorough understanding of potential risks and benefits, challenging the stereotype of being overly cautious.
7. What are practical steps to mitigate cognitive biases?
To counter cognitive biases, try:
Conducting "premortem" exercises to anticipate potential challenges.
Using data and diverse perspectives to evaluate risks objectively.
Avoiding reliance on initial information or gut feelings without validation.
8. How does empathy influence risk perception?
Empathy allows individuals to consider not only their own risks but also the impact on others. In organisational settings, empathetic leaders can make more inclusive, thoughtful decisions that balance individual and collective well-being.
9. How do voluntary and imposed risks differ?
Voluntary risks, such as choosing to go skydiving, are often seen as more acceptable because they are under personal control. Imposed risks, like public health mandates, may feel more threatening because they limit individual choice.
0. Where can I learn more about risk perception and leadership?
The RiskMasters Podcast is a great resource for diving deeper into these topics. Featuring interviews with senior executives and thought leaders, it explores the nuanced dynamics of risk, leadership, and decision-making.
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