Risk Culture: It's Not What You Think It Is

Almost a century ago, economist Frank H. Knight, in his essay, Risk, Uncertainty, and Profit (1921), made a distinction between risks (known odds with an “actuarial value” or a mathematical probability of loss) and uncertainty (ambiguous odds—non-quantifiable, uninsurable risks). That risk management includes compliance activities around uncertainties - not risks - indicates that the modern risk discussion continues to confuse the two. This inherent "duality" of risk is noted by two logics: the “logic of opportunity” and the “logic of precaution,” the former indicated by entrepreneurialism, innovation and risk-taking while the latter stresses control, safety, regulation, and risk-avoidance. However, it uncertainty aversion, not risk-aversion, that leads to non-participation in financial markets in some cultures and thus, less innovation and risk-taking (i.e., the opposite of the “logic of opportunity”). Regulation can moderate the effects of uncertainty, and thereby increase investment and positive financial performance. The more a country's culture leans toward ambiguity aversion, the more a regulation or accounting standard/control will encourage investment. In short, “nothing ventured, nothing gained” is an idiom that works in all cultures to produce value and positive financial performance in organizations, but regulation and constraint also work to produce the same—particularly in those countries which have a low tolerance for uncertainty. In this workshop, Dr. Tara Kenyon will show that the management of risks produces value and better financial performance while the "management" of uncertainty may, in a risk-taking culture, actually reduce the value of a company.