Liberty Posted February 27, 2020 Share Posted February 27, 2020 https://hbr.org/amp/2020/03/your-company-is-too-risk-averse Interesting piece. presented the following scenario to 1,500 managers: You are considering a $100 million investment that has some chance of returning, in present value, $400 million over three years. It also has some chance of losing the entire investment in the first year. What is the highest chance of loss you would tolerate and still proceed with the investment? A risk-neutral manager would be willing to accept a 75% chance of loss and a 25% chance of gain; one-quarter of $400 million is $100 million, which is the initial investment, so a 25% chance of gain creates a risk-neutral value of zero. Most of the surveyed managers, however, demonstrated extreme loss aversion. They were willing to accept only an 18% chance of loss, much lower than the risk-neutral answer of 75%. In fact, only 9% of them were willing to accept a 40% or greater chance of loss. What’s more, the size of the investment made little difference to the degree of loss aversion. [...] corporate incentives and control processes actively discourage managers from taking risks—a conclusion he felt was supported when managers he interviewed acknowledged that although their risk aversion was bad for their companies, it was good for their careers. [...] For all but the largest investments, the consequences of project failure would be far higher for the managers than for the company as a whole. Link to comment Share on other sites More sharing options...
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