Dan Lovallo

Tim Koller

Robert Uhlaner

Daniel Kahneman

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">Idea in Brief</h4>
 <div class="ideainbrief-contents">
  <h5>The Problem</h5>
  <p>In theory, companies create value for stakeholders by making risky investments. In practice, however, managers in large corporations routinely quash risky ideas in favor of marginal improvements, cost-cutting, and “safe” investments.</p>
  <h5>The Cause</h5>
  <p>Most managers in large organizations are significantly more risk-averse than CEOs, who consider each investment in the context of a greater portfolio.</p>
  <h5>A New Approach</h5>
  <p>This article explains how loss aversion works, presents an analysis of just how much value managers’ attitudes toward investment risk leave on the table, and offers suggestions for changes in practices and systems.</p>
 </div>
</article-ideainbrief><p>In theory, companies are supposed to create value for stakeholders by making risky investments. And as long as no single failure will sink the enterprise, those investments may be quite large. It won’t matter if even a significant percentage of them fail so long as the success of other bets compensates, which usually happens. It’s an approach to investment that’s supported by economic theory going back to the 1950s work of Nobel laureate Harry Markowitz on portfolio optimization.</p>

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<p>In theory, companies create value for stakeholders by making risky investments. In practice, however, managers in large corporations routinely quash risky ideas in favor of marginal improvements, cost-cutting, and &#8220;safe&#8221; investments.</p>
<p>Why are managers in large, hierarchical organizations so risk-averse? Corporate incentives and control processes actively discourage managers from taking risks. Whereas CEOs consider each investment in the context of a greater portfolio, managers essentially bet their careers on every investment they make&#8212;even if outcomes are negligible to the corporation as a whole.</p>
<p>This article explains how loss aversion works, presents an analysis of just how much value manager attitudes toward investment risk leave on the table, and offers suggestions for changes in practices and systems.</p>

Your Company Is Too Risk-Averse

In theory, companies create value for stakeholders by making risky investments. In practice, however, managers in large corporations routinely quash risky ideas in favor of marginal improvements, cost-cutting, and “safe” investments. Why are managers in large, hierarchical organizations so risk-averse? Corporate incentives and control processes actively discourage managers from taking risks. Whereas CEOs consider each investment in the context of a greater portfolio, managers essentially bet their careers on every investment they make—even if outcomes are negligible to the corporation as a whole. This article explains how loss aversion works, presents an analysis of just how much value manager attitudes toward investment risk leave on the table, and offers suggestions for changes in practices and systems.

Your Company Is Too Risk-Averse

Summary.

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