A New Model of Risk-Taking

What affects people's willingness to take risks? What do they learn from risk-taking? How do modern organizations build talented work forces that are willing to take risks? How do organizations encourage intelligent risk-taking in order to innovate?

These are some of the practical questions underlying an award-winning research article authored by Sim B. Sitkin, associate professor of management at Fuqua. The article, "Determinants of Risky Decision-Making Behavior: A Test of the Mediating Role of Risk Perceptions and Propensity," was named the Best Published Paper of 1995 by the Organizational Communication and Information Systems Division of the Academy of Management. The article appeared in the December 1995 issue of the Academy of Management Journal.

Sitkin had previously developed a theoretical model for systematically studying risk. The studies reported in the award-winning article, which Sitkin wrote with Laurie Weingart of Carnegie Mellon University, were his first effort to test the model empirically. The award suggests that management scholars have both a strong interest in and respect for Sitkin's work.

Traditional models of risk-taking predict that a person's history of success and failure in taking risks and how a problem is framed-whether it is portrayed as a threat or as an opportunity-directly affect that person's risk-taking behavior. Recent studies had let researchers to discount traits such as one's propensity to take risks. Sitkin, however, reasoned that this trait in particular had been improperly conceptualized, so that its effects went unnoticed.

Sitkin's model adds two components to the traditional model and predicts that risk-taking depends on one's propensity to take the specific risk and on how the risk is perceived. Specifically it predicts that one's history of risk-taking is acted on by the person's propensity to take risks, which Sitkin defines as a changeable trait that becomes stable with experience. The model also predicts that people who tend to take risks tend to perceive less risk.

In Sitkin and Weingart's study, most of the model's predictions held up, which gives preliminary evidence that one's perception of risk and propensity to take risks affect his or her risk-taking behavior.

What does such a study mean for managers? If Sitkin's model holds up, it can be used to build tools for predicting and influencing employees risk-taking behaviors. For example, the model suggests that, in framing problems, managers should account for employees' perceptions of risk and their tendencies to take or avoid risk. The model further highlights how managers can promote appropriate risk-taking experiences early in careers, since the tendency to take or avoid risks becomes stable and harder to influence over time.

The article's underlying message is that organizations must systematically account for and promote risk-taking in order to be adaptive and innovative. They must manage employee development in ways that reward appropriate risk-taking. An environment that places the consequences of mistakes and failure solely on workers can discourage innovation and learning, something modern organizations cannot afford.