Understanding and Managing Risk Attitude Nature release Managers looking to move to higher levels of risk management maturity in their organisations willfind much insight andguidance in this innovative book. Prof Graham M. Winch, Centre for Research in the Management of Projects, Manchester Business School This book provides a pivotal insight into the complexities of human behaviour, psychological influences and subconscious preferences that determine how people initially respond to significant uncertainty and creates a road map to change risk attitude ifit is both necessary and desirable. Carl West, Operations Auditor, British Waterways This book highlights how riskattitude factors influence the human psyche, and carefully explains the impacts. Organisations seeking to dramatically improve the effectiveness of their risk management process will want to use this book's insights. Craig Peterson, President, PMI Risk Management SIG This book has prompted me to think more deeply as a change director. Jon Bassett, Director of Implementation, AXA Life UK Understanding and Managing Risk Attitude DAVID HILLSON and RUTH MURRAY - WEBSTER GOWER O David Hillson and Ruth Murray - Webster 2005 AU rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. Published by Gower Publishing Limited Gower House Croft Road Aldershot Hants Gull 3HR England Gower Publishing Company Suite 420 101 Cherry Street Burlington, VT 05401 - 4405 USA David Hillson and Ruth Murray - Webster have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as the authors of this work. British Library Cataloguing in Publication Data Hillson, David, 1955 - Understanding and managing risk attitude 1. Risk management I. Title 11. Murray - Webster, Ruth 658.1'55 ISBN 0 566 08627 1 Library of Congress Cataloging - in - Publication Data Hillson, David, 1955 - Understanding and managing risk attitude I by David Hillson and Ruth Murray - Webster. p. cm. Includes bibliographical references and index ISBN: 0-566 - 08627 - 1 1. Risk management. I. Murray-Webster, Ruth. 11. Title. HD61 .H48 2005 658.15'5 dc22 Typeset by IMLTypographers, Birkenhead, Merseyside and Printed in Great Britain by MPG Books Ltd. Bodmin, Cornwall Contents List of Figures List of Tables Foreword Preface Acknowledgements PART 1: THE PROBLEM 1 Risk Management Status Quo - Efficient but not Effective? The risk environment What is risk? What is attitude? Risk management in today's business Is risk management effective? Purpose and structure of this book 2 The Importance of Human Factors in Risk Management Why human factors matter to risk management Risk management and the individual Risk management and the group Diagnosis is not the same as treatment PART 2 : UNDERSTANDING RISK ATTITUDES 3 General Principles of Risk Attitudes The risk attitude spectrum Basic risk attitudes Situational influences on preferred risk attitude Internal influences on preferred risk attitude Conclusion and summary 4 Individual Risk Attitudes and Heuristics Covert factors influencing individual risk attitude The availability heuristic The representativeness heuristic ix xi xiii xv xvii vi U N D E R S T A N D I N G A N D M A N A G I N G R I S K A TT I T U D E The anchoring and adjustment heuristic The confirmation trap Understanding individual heuristics 5 Group Risk Attitudes and Heuristics Understanding group risk culture The groupthink heuristic The Moses Factor The cultural conformity heuristic The risky shift and cautious shift heuristics The influence of national culture Modifying group risk culture PART 3 : UNDERSTANDING EMOTIONAL LITERACY 6 Emotion - Definition and Relevance Emotion in the workplace The history of emotional intelligence From emotional intelligence to emotional literacy Emotional literacy and risk management Conclusion 7 Emotional Literacy for Individuals Transactional Analysis and emotional literacy Open loop system A mind - set of choice Component parts of individual emotional literacy Stages of individual emotional development 8 Emotional Literacy for Groups Component parts of group emotional literacy The role of leadership Going forward PART 4 : IMPLEMENTATION ISSUES 9 Applying Emotional Literacy to RiskAttitudes Emotionally literate management of risk attitudes Making the change Summary and first steps CONTENTS ~ii 10 Final Thoughts and the Way Ahead Simple but difficult Difficulties in understanding risk attitude Difficulties in managing risk attitude Too hard? Future developments Conclusion Appendix : Emotional IntelUgencelLiteracy Tooh 161 Bibliography and Further Reading 167 Index 179 List of Figures Efficiency, effectiveness and efficacy (from Bull, 2005) Hierarchies of membership and influence Typical risk management process (based on APM, 2004) Effect of corporate risk attitude on risk management resourcing Attitude, behaviour and consequences Behaviour in neutral or positive environments Behaviour in hostile environments Behaviour in uncertain environments Spectrum of risk attitudes Situational influences on risk attitude The availability heuristic The representativeness heuristic The anchoring and adjustment heuristic The confirmation trap Group heuristics possible interrelationships Risky shift and cautious shift heuristics Correlating power distance index (PDI) and uncertainty avoidance index (UAI) (from Hofstede, 2001) Link between the psychological and physiological effects of emotion Descartes' six passions Transactional Analysis: the rational adult gets data from three sources Interplay of Transactional Analysis life positions A depiction of the Triune Brain (adapted from Paul MacLean) The need for awareness of self and others The importance of regard for self and others Achieving appropriate behavioural flexibility Emotional expression and self - control Adapted from the Luft and Ingham Johari Window Potential positive outcomes of conflict Stages in emotional development (adapted from Steiner) Stages in group development (after Tuckman) PESTLE analysis Spectrum of risk attitudes Default initial risk attitude Situational initial risk attitude Self - awareness and decision - making X UNDERSTANDING AND MANAGING RISK ATTITUDE 9.5 Applying emotional literacy to change risk attitude 148 10.1 Human factors as a CSF for effective risk management 152 List of Tables Critical Success Factors for effective risk management Influence of individual risk attitudes on risk management process Influence of organizational risk attitudes on strategic decisions UAI and PDI data by countrylregion (from Hofstede, 1982) Gardner's seven intelligences Component diagnostic elements of emotional literacy for individuals Explaining the Johari Window (from Luft and Ingham, 1955) Behaviour in conflict Relevant diagnostic elements of emotional literacy for groups Managing risk attitudes [...]... manage risk attitudes so that they can apply the learning to risky business situations, for example those associated with safety risk, project and programme risk, financial risk and so on The book will certainly help with these areas Even more importantly though, we hope that business readers will engage with the text at a personal level and learn more about understanding and managing their own risk attitudes... be promoted and managed,for both individuals and organizations This book brings together leading-edge thinking on risk attitudes and emotional literacy to guide those wishing to move beyond mere implementation of a risk process and towards a people-centred approach for risk management It offers a unique xvi UN D ERSTA N D I N G AND M ANAGI NG RI SK ATTITUDE framework for understanding and managing those... following paragraphs and summarized in Table 2.2, using the shorthand labels 'risk- averse' and 'risk- seeking' to represent two points at either end of the risk attitude spectrum Table 2.2 Influence of individual risk attitudes on risk management process Process stage (main aim) Influence of risk- aversion Influence of risk- seeking - INlTlATlONOF RlSK PROCESS Set appropriate levelof detail for risk process... threat levels and significant opportunkiesfor Improvement PROCESS MANAGEMENT Review and update risk information High level of oommltment to risk process Regular provision of updated risk information, identifying new risks, participating in risk reviews and so on Low level of mmrnkmentto risk process Failure to update risk information, identify new risks, or participate in risk reviews and so on ... governance business risk reputation risk business continuity disaster recovery strategic risk financiallcreditltreasury risk country risk RlSK M A N A G E M E N T STATUS Q U O - EFFICIENT BUT N O T EFFECTIVE? 11 a market risk a project risk operational risk technical risk a health and safety a environmental risk This breadth of application emphasizes the need for a joined-up approach to risk management... individuals Groups of people also hold identifiable attitudes towards risk, which are not necessarily the sum or average of the risk attitudes of the constituent individuals And corporate risk attitude drives action at the group level, especially decisionmaking, as surely as individual actions are influenced by personal risk attitude Both personal and corporate risk attitudes are considered in more detail in... aims to make a significant and positive contribution to creating such understanding by addressing the specific question of risk attitudes This introduces two more terms which deserve careful definition, namely risk and attitude These are addressed in the next two sections WHAT IS RISK? Risk is not the same as uncertainty, so how are the two related? The word 'risk' is a common and widely used part of... influences can be identified and understood, the possibility of changing them is introduced, allowing individuals and groups to manage their attitudes proactively- which is the basis of emotionalliteracy The fact that attitudes can be modified is essential to the case for understanding and managing risk attitudes If attitudes were fixed inherent attributes of individuals, inborn and unchangeable, then while... psychological aspects; and the concept was then expanded to refer to individual, group and organizational factors which can affect safety at work Most recently human Table 2.1 Critical Success Factors for effective risk management Shared understandingof key concepts and principles of risk management Agreed definitions of key risk management terms, common language Simple and scaleable process for risk management... promises Risk management is undertaken by people acting individually and in various groups The human element introduces an additional layer of complexity into the risk process, with a multitude of influences both explicit and covert These lead to adoption of risk attitudes which affect every aspect of risk management Risk attitudes exist at individual, group, corporate and national levels, and can be . Spectrum of risk attitudes Default initial risk attitude Situational initial risk attitude Self - awareness and decision - making X UNDERSTANDING AND MANAGING. anchoring and adjustment heuristic The confirmation trap Understanding individual heuristics 5 Group Risk Attitudes and Heuristics Understanding group risk