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Risk Types for Risky Business

14 December 2010

± minute read

    Risk Types for Risky Business
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Author: Geoff Trickey In a recent UK newspaper article headlined “To do ‘God’s work’, bankers need morals”, the author is drawing on claims made by Goldman Sachs chief executive Lloyd Blankfein that bankers were “doing God’s work”. The article goes on to wrestle with issues surrounding the recent financial melt down and the ongoing series of rogue trading activities that have destroyed some financial institutions and threatened the survival of many more. Of course bankers, and many others, do indeed need morals, but if we wait for that to happen we could wait a very long time. We live in an increasingly secular world where moral decisions no longer have an anchor in tradition or religion. Morals have become expedient and the ends are used to justify the means. Nevertheless, the title of the article puts its finger on a very important point.

Whether or not we act in the most honourable way is a matter of personal integrity, and personal choice. Human behaviour is always the outcome of a struggle between what we want to do and what we are expected to do. But the similarities between individuals stops there - the strength of these ‘what we want’ impulses is not the same for everyone. Whatever the permutation of needs and desires that we, as individuals, are blessed with, we have to manage them. Whether or not we are bankers we have to kerb excesses and foster socially acceptable behaviours in order to fit in and get on in life. This is just everyday life experience. Petulance, self-centredness, selfishness may be tolerated in small children, but not in adults. The fact that certain personality profiles are more prevalent than others within the prison population is testament to the inequality of this struggle and the dramatic nature of the potential consequences. The fact that others with a similar endowment can succeed in life confirms that success is possible even when the going is difficult. Risk is a part of this same dynamic. Your personality may dispose you to take risks or to avoid them like the plague. Disposition towards risk is in your DNA. People are, by nature, defined by the extent to which they are fearful or adventurous, careful or reckless, impulsive or controlled, cautious pessimists or gung-ho optimists, all the aspects of temperament that have evolved through our reptilian and mammalian history along with ‘flight and fight’ mechanisms, the endocrine system, capacity for nurturance, attachment and curiosity. We can, and do, breed animals for these same characteristics. They are hard wired. Bankers, like the rest of us, vary in these ways. Some are more disposed to take risks than others. In addition to these foundations of risk, they are also influenced by what is going on, what is flavour of the month and, of course, what is profitable. If one’s temperament is broadly the Nature of risk, these influences are the Nurture of risk. Fuelled by the climate of opinion and the momentum of events, surface attitudes can be developed in this way, but underlying dispositions will not change. Early into the present economic crisis, those that had been swept along to create record-breaking levels of dept could not now pay back quickly enough. Nations, businesses and individuals were now breaking records in reducing debt as people returned to type. So much for attitude as a predictor! In short, the extreme risk types pushed the envelope and, encouraged by their success, they allowed their carelessness about risk a loose rein. Many of the more cautious risk types were encouraged to follow the trend. A few held back and some even started to blow whistles – although, in those heady days, no one would listen. Restraint became a dirty word, Gordon Gekko’s Wall Street mantra “greed is good” ruled and all discipline was lost. Undoubtedly, one reason that things got so out of hand was that there was no perception of these developing trends. Like the Titanic, the warnings came much too late. While the Titanic lacked radar, financial institutions lacked any awareness of propensity for risk in the people that they employed. They could only go on past records of achievement because there was no established, coherent model or risk typology, no differentiated vocabulary to describe risk takers. Eskimos, it is said, have many words for ‘snow’ because awareness of conditions is essential for survival. The financial sector had no equivalent appreciation of the corporate risk landscape. Even when there is clear personal responsibility for a calamity, the financial press is still obsessed with issues of governance, regulation and legislation and the debate rapidly refocuses from the perpetrator to the process. There is an obvious reason for this. In the absence of any typology or vocabulary to support differentiation of risk takers, when it comes to human factor risk, discussion is reduced to a simplistic good/bad dichotomy. The surprising thing is that, although risk taking so clearly reflects personality, no adequate risk focused assessment tools were available. Where, for example, Financial Advisers assessed the appetite for risk of their clients, as they have been required to do by the FSA, these assessments reflected neither the important developments in personality profiling of the past decade, nor the research that emphatically endorses personality as the best predictor of client risk tolerance. Over the past two years, research at PCL has developed a risk typology in response to requests from the financial sector. The result of this project is the Risk-Type Compass, a psychometric questionnaire generating reports that assign examinees to one of eight risk types. The project extracted all the themes from today’s consensual personality model (the Five Factor Model – FFM) that had any possible relationship with risk and, using factor analytic techniques, identified four ‘pure’ types (the N, S, E, W of risk) and four additional ‘complex’ types that provide the quarter points of the compass: The Spontaneous Type (C) Impulsive and excitable, the Spontaneous Type enjoys the spontaneity of unplanned decisions. They are attracted to risk like moths to a flame, but are distraught when things go wrong. Their passion and imprudence make them exciting but unpredictable. The Intense Type (P) Highly-strung, anxious, alert to any risk and fearful of any threat to their precarious equilibrium, the Intense Type invest a lot emotionally in people and projects and are nervous about failure. Passionate and self-critical by nature, they take it personally when things don’t work out. The Wary Type (C) Self-disciplined and wary of risk, the Wary Type is organised but unadventurous and puts security at the top of the agenda. They will be drawn to the idea of securing their future but anxious that, however well it has worked for others, something may go wrong in their case. The Prudent Type (P) Very self-controlled and detailed in their planning, the Prudent Type is organised, systematic, conservative and conforming. Conventional in their approach, they prefer continuity to variety and feel most comfortable sticking to what they know. The Deliberate Type (C) Self-confident, systematic and compliant, the Deliberate Type tends to be unusually calm and optimistic. They experience little anxiety and tackle risk and uncertainty in a business like and unemotional way. They never walk into anything unprepared. The Composed Type (P) The Composed Type is cool-headed, calm and unemotional, but at the extreme they may seem almost oblivious to risk, unaware of its effect on others and unfeeling. They take everything confidently in their stride, seem quite imperturbable and manage stress exceptionally well. The Adventurous Type (C) The Adventurous Type is both impulsive and fearless. At the extreme, they combine a deeply constitutional calmness with impulsivity and a disregard for tradition or convention. They seem imperturbable and unconcerned about risk. The Carefree Type (P) Impulsive and unconventional, the Carefree Type is adventurous, excitement seeking and, in extreme cases, reckless. Not being good at detail or careful preparation, they often seem vague about their intentions. Their impatience and impulsiveness exposes them to making hasty and imprudent decisions. Much of life’s richness comes from the fact that people are so varied. Personalities, like colours, vary amazingly as a result of the capacity of primary factors to yield innumerable combinations. Evolutionary success relies on within species diversity and, as human beings, we see it each day as we walk down the street. Capturing these differences and providing commerce and industry with the tools to differentiate critical individual differences is the task of business psychology. Without them we are oblivious to the dynamics that the shape events that we need to control. To learn more about the Risk Type Compass, please ask for one of our psychometric advisors: 011 781 3705 || fatima@jvrafrica.co.za [photo by jonrawlinson]

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