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Understanding Risk

Which option of each pair would you choose? Are you’re a risk-taker or risk-averse?
A) 62% chance of gaining $20.00 38% chance of losing $ 6.20 OR B) 62% chance of gaining $40.00 38% chance of losing $38.00	Choose A or B? Both alternatives offer a payoff of about $10* but the more risk-averse person will prefer option A because it has the lower loss amount. *Payoff equals the chance of risk times each outcome and subtracting the weighted loss from the weighted gain.
1) 28% chance of gaining $40.00 72% chance of losing $ 1.40 OR 2) 62% chance of gaining $40.00 38% chance of losing $38.50	Choose 1 or 2? Both alternatives offer a payoff of about $10 but the loss for option 2 is much larger. The risk-averse person will generally prefer option 1 because of the smaller associated loss.
I) 100% chance of winning $10.00 OR II) 62% chance of winning $28.50 38% chance of losing $20.00	Choose I or II? Again both alternatives have a payoff of about $10. The more risk-averse person will choose option I. They prefer the certainty of having the $10 to making the wager itself.

Summary of Relationships between Risk Propensity and Personal, Financial, and Business Characteristics *
CHARACTERISTIC	RISK AVERTERS	RISK TAKERS
PERSONAL
Dependents	Managers with more dependents take more risk in some situations and less risk in other situations
Age	Older managers take less risk	Younger managers take more risk
Education	Managers with high school education or bachelor's degree take less risk	Managers with postgraduate training take more risk
FINANCIAL
Wealth	Managers with more wealth take more risk in some risky situations and less risk in other situations
Income	Managers with less income take less risk	Managers with more income take more risk
BUSINESS
Position	Managers below the senior VP level take less risk	CEO’s and COO's take more risk
Authority	Managers with less authority take less risk	Managers with more authority take more risk
Seniority	Managers with longer seniority take less risk	Managers with shorter seniority take more risk
Firm size	Managers in larger firms take less risk	Managers in smaller firms take more risk
Industry	Managers in the banking industry take less risk	Managers in the venture capital and underwriting industries take more risk
SUCCESS	Less successful managers take less risk	More successful managers take more risk

Successful organizations generally have a balance of risk-averters and risk-takers. What's yours?

*Reference and recommended reading: Taking Risks: The Management of Uncertainty, MacCrimmon, K.R., Wehrung, D.A. 1986. The Free Press, NY, NY

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