A Risk by Any Other Name...

Risk management decisions may require careful framing to remove the emotions and myopia of decision-makers from the equation.

062513_Kunrether_photo-2Howard Kunreuther is the James G. Dinan professor of decision sciences and public policy, and co-director of the Risk Management and Decision Processes Center, at the University of Pennsylvania’s Wharton School. He has done a great deal of research on how people make risk management decisions in both consumer and business settings.

One recent study examined the roles that consumers’ emotional states and time horizons play in decisions about whether to purchase insurance. Treasury & Risk sat down with Dr. Kunreuther to discuss the implications of this research for corporate finance and risk management functions.

T&R:  To what degree should a company look at the risk appetites or risk aversion of individuals when hiring for finance or risk management positions?

HK:  It’s extremely important to understand the ability of individuals to fit into the organization, so their personal attitudes towards risk should be considered in hiring decisions. The concept of risk appetite is a term we have been hearing frequently in interviews with decision-makers who deal with catastrophic risks facing their firms. An individual’s risk appetite may differ from that of the organization, and they both need to be considered. The financial crisis reflects what can happen when individuals have risk appetites that are very different from what the organization would advocate.

T&R:  Is there a way to reduce the effect of past experience on risk management calculations—or is that even something companies should try to do?

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