Risk taking doesn't always pay off for executives
Executives get paid to take risks, but they should pause and consider their motives before rolling the dice, a Thunderbird professor said this week at a global conference in Anaheim, Calif.
“The assumption is that all risk taking is equal,” said Nathan T. Washburn, Ph.D., during a paper presentation at the 68th annual meeting of the Academy of Management, an association of about 18,000 scholars and business leaders from 102 nations. “But there are different types of risk taking, and not all risk taking is going to improve the performance of the organization.”
The key to predicting success, he said, is not the amount of risk an executive takes, but the motivation for risk taking.
Some executives stuck in a rut take risks to turn around a bad situation or to fulfill unmet aspirations. Other executives bolstered by a history of success take risks to accomplish something meaningful because they derive intrinsic satisfaction from overcoming challenges.
“Our research shows that these higher performers engage in a fundamentally different type of risk taking than their lower performing counterparts,” said Washburn, an assistant professor at Thunderbird School of Global Management in Glendale, Ariz. “They are more likely to pursue radical innovations and persevere when challenges arise.”
Perhaps more significant, the research shows that risk takers seeking intrinsic satisfaction are more likely to deliver positive results for their organizations.
Washburn lays out the evidence for this phenomenon in “Past Performance and Organizational Risk Taking,” a paper he is drafting with co-authors Marianna Makri, Ph.D., an assistant professor at the University of Miami School of Business, and Luis R. Gomez-Mejia, Ph.D., a regents’ professor at the W.P. Carey School of Business at Arizona State University.
Motivated by rewards
Decades of research have tied past performance to the amount of risk an organization takes.
Because low performers have more unfulfilled aspirations than high performers, they tend to engage in more risk taking to fulfill these aspirations. The wider the gap grows between performance and aspirations, the stronger the desire grows for the rewards associated with risk taking.
Executives become desperate for a financial payoff, a quick turnaround or some other type of reward. So they take a gamble.
Motivated by efficacy
Washburn said this model of risk taking is accurate, to a point. But it is also a simplification.
“High performance may reduce an executive’s need for rewards,” he said. “But other motivations exist to take risks. One is the intrinsic motivation of efficacy.”
Efficacy refers to the confidence that successful people develop in their ability to overcome challenges. Executives motivated by efficacy see potential in their resources and abilities to accomplish something meaningful.
“They take risks because overcoming challenges brings satisfaction,” Washburn said. “Success reinforces these feelings of confidence, drives up efficacy and spurs additional risk taking.”
Thus, the important difference between high and low performers is not how much risk they take, but why they take risks. Engaging in risk taking because of efficacy is different than risk taking because of desire for rewards.
“This is because these different motives do more than just generate a certain level of risk taking,” Washburn said. “They guide and limit which risks are selected and influence how the selected risks are implemented.”
Focusing on capabilities
For starters, Washburn said, executives motivated by efficacy are more likely to take risks that they are capable of managing.
This is because efficacy comes from a belief in an organization’s capabilities and from envisioning how these capabilities can be used to take risks successfully. Efficacy leads to a type of risk taking that builds on, stretches and further develops an organization’s capabilities.
On the other hand, executives motivated by a desire for rewards are discontent with the current situation, including their organization’s capabilities. Thus, their desire for change leads to a type of risk taking that sets aside or downplays their organization’s capabilities.
Risk taking motivated by efficacy also produces sustained effort when difficulties arise.
“Executives who engage in risk taking because of their confidence and optimism in their organization’s resources are less likely to interpret difficulties as evidence of probable failure,” Washburn said. “This tendency to persevere allows executives motivated by efficacy to pursue radical innovations that take longer to develop.”
Executives who engage in risk taking because of their desire for rewards, meanwhile, often settle for incremental innovations that take less time to develop. This is because they have a tendency to switch course or lose focus when challenges arise.
This lack of perseverance may occur because executives in low-performing organizations are looking for a way out of their current situation — which means many other situations may appear preferable.
“With so many options available, executives motivated by rewards are often less willing to stick with any particular risk when difficulties arise,” Washburn said.
Raising the bottom line
All of this has an impact on the bottom line.
“Executives motivated by efficacy select risks that stretch and develop their organization’s capabilities and have the perseverance necessary to overcome the difficulties they encounter in the process,” Washburn said. “This type of risk tends to strengthen future performance.”
Executives motivated by a desire for rewards deemphasize their organization’s capabilities and select risks that require less perseverance. Instead of turning around performance problems, this type of risk tends to make matters worse.
Put simply, Washburn said, motives matter when it comes to taking risks.