Balancing opportunity and risk is the key to success in any business. The overall propensity for risk taking will be a reflection of the individuals within the organization. Of course, many factors influence risk taking but none will be more consistent than that embedded within this corporate DNA. Risk taking proves to be an inherent component of personality. The full extent of this was not generally recognized until recent studies identified the many “risk themes” that permeate the major factors of personality. Eight distinct risk types were subsequently identified in a sample of over 2,000 people working in a wide range of professions and sectors (Trickey, 2012).
There are many influences on risk taking and its outcomes that are incidental, transient, and unsystematic; unpredictable influences that are incapable of quantification. This “noise” in the system has obscured the consistency of the human risk factor. We have to accept that there must always be uncertainties associated with risk but also recognise that individual propensity for risk will have a consistent and pervasive influence.
An assessment tool
The Risk-Type Compass is a personality based psychometric instrument that provides a comprehensive assessment of an individual’s propensity for risk taking, their current appetite for risk and an overall estimate of risk tolerance (see Figure 1; Trickey and Stewart, 2010). It is important to appreciate that within this Risk Type model, perception of risk and propensity for risk taking are inseparable. The most extreme risk takers read uncertainty as safe until proved otherwise, whilst the risk averse read uncertainty as risky until proved otherwise.
At its simplest, there are two reasons why people take risks. One is concerned with a lack of fear and anxiety and the other concerns impulsivity and thrill-seeking. Combined with their opposite extremes, this creates the four poles of the Risk-Type Compass. The fact that we will all register somewhere on each of these scales and the possibility of being high on either, neither or both, creates the possibility of eight different risk types.
The spectrum of risk types
Being rooted in personality, risk type is the most stable aspect of propensity for risk. The following
cameos provide the flavour of the eight risk types.
- Excitable type – spontaneous/unpredictable/enthusiastic/impulsive. Like moths to a flame, they are attracted by the idea of spontaneity and risk, but live to regret decisions made in
- Intense type – ardent/anxious/edgy/passionate. They invest passionately in people and projects but, haunted by a fear of disappointment, this often becomes a self-fulfilling prophecy.
- Wary type – self-disciplined/cautious/uneasy/conservative. Ultra-sensitive about vulnerability to risk, they are zealous about securing their future and fervently seek to
- Prudent type – detailed/organized/systematic/conscientious. Their primary concern is to bring order to everything and to eliminate uncertainty.
- Deliberate type – analytical/investigative/calm/business-like. Calculated and sure-footed, they test the ground and never go into anything
- Composed type – cool-headed/self-contained/imperturbable. Strangers to anxiety and oblivious to risk, they keep their heads when others lose
- Adventurous type – uninhibited/fearless/challenging/venturesome. Both fearless and impulsive, they are prepared to try things that no one has ever tried
- Carefree type – easy-going/excitement seeking/unconventional/impetuous. They relish the excitement of on-the-fly decision making required in fast moving
The Risk-Type Compass has applications at the level of the individual, the team and the organization and for selection, personal development, team dynamics and organizational surveys. Arguably, in view of their potential influence on the culture of the organisation, its most effective applications are likely to be at top management and board levels.
The graveyard of former greats is littered with examples where the balance of risk went seriously awry; the ENRON and RBS stories have become iconic references in the pantheon of corporate governance and corporate mortality. Eastman Kodak might be a nominee for the opposite pole – the corporately risk averse. Since risk taking attracts risk takers and risk aversion attracts the cautious, when management is oblivious to these individual differences such imbalances are certain to occur.
The proper management of risk is ultimately a matter of corporate governance as well as commercial success; the buck stops in the boardroom. The pivotal issues for this balancing act are different for every sector and every profession but it involves all employees to a greater or lesser extent. In fact it is hard to think of any enterprise that doesn’t involve uncertainty and the need to take risks. All of the risk types have their benefits and disadvantages – determined as much by the role as by the individual. The challenge is to ensure that the right risk types are in the right positions within the organization and managed appropriately.
Geoff Trickey Based at The Psychological Consultancy.