Magazine article Training & Development

The Art of Prudent Risk Taking

Magazine article Training & Development

The Art of Prudent Risk Taking

Article excerpt

Here's how to determine your risk threshold and how to take reasonable risks that open possibilities for leadership, personal growth, and innovation. Start with a beginner's mind.

The words prudent and risk taking may seem contradictory, but one dictionary defines prudent as "exercising sound judgment in practical matters; managing carefully; being circumspect and cautious." Risk taking can be defined as making decisions that have the potential for gain or loss, with uncertainty built in. A decision made under risky circumstances can be sounder when the decision maker is circumspect and prudent. But he or she has to know which risks to pursue and which to abandon or modify.

The potential gains include money, health, power, respect, prestige, and positive relationships. The losses include the possibility of injury, liability, embarrassment, and wasted resources. The probability of gain or loss is rarely known definitively. An exception is a state lottery, in which this equation spells out the odds:

Expected Outcome Value = Probability of Occurrence x Value Derived

If the pot is $20 million and the odds of winning are one in 40 million, your lottery ticket has an Expected Outcome Value of 1:40 million x $20 million = 50 cents.

If you pay more than 50 cents for a lottery ticket, you're operating on another agenda.

In most work-related situations, probabilities are less precise and more subjective. They're colored by a person's past experience, organizational culture, and propensity for risk taking. It's important to understand one's risk taking patterns, one's perceptions rooted in personal and professional history, and the degree to which cultural injunctions encourage or deter prudent risk taking.

The patterns

Two patterns can distort how one interprets the evidence for making decisions involving risk: risk preference and risk avoidance. The Risk Taking Inventory (see information at the end of the article for how to get the inventory) helps people determine whether they tend to be risk seekers, risk avoiders, or risk neutral. Knowing that can be valuable because people with a risk-avoidance pattern may miss opportunities to influence desired outcomes; people with a risk-preference pattern may make themselves, others, or their organizations vulnerable to unnecessary risk. A self-assessment inventory can help people understand the filters through which they judge the degree of risk.

People with a risk-preference pattern tend to

* underestimate uncertainties

* act based on overoptimism

* seek excitement and novelty

* overestimate the probability of attaining the desired outcomes

* decide impulsively.

Motto: Nothing ventured, nothing gained.

People with a risk-avoidance pattern tend to

* overestimate uncertainties

* defer taking action based on over-pessimism

* prefer security and comfort

* underrate or ignore the probability of attaining the desired outcomes

* postpone making decisions or close the door too quickly

Motto: Better safe than sorry.

One's experience and expertise with similar past issues can keep one from seeing new possibilities. A beginner's mind - a Zen Buddhist term - can be helpful. In that state of childlike curiosity, we are free from limiting assumptions and open to fresh perspectives, which can be discarded later if they don't fit our needs.

New or subtle changes can render someone's past experience inapplicable. Hidden in what appears to be "the same old thing" might be heightened customer expectations, staff changes, new product components, altered test procedures, or lower inventory levels. Risk is inherent in newness, and it deserves thoughtful exploration.

The culture and training

To what degree do employees think your organization supports prudent risk taking? Some companies routinely question each proposal - whether from marketing, production, or engineering - by asking, "Has the issue of risk been addressed? …

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