The Key to Risk

Forbes.com recently published an interesting article -- The Key To Risk: It's All About Emotion -- about the economic crisis and how to handle risk in an unpredictable business environment. According to author Kevin Kelly, the crisis was brought on partly by enormous miscalculations of risk. He points out how vital it is to appreciate how much our perceptions of risk are being framed emotionally and culturally. "Now, fear -- fear of loss -- dominates the landscape, despite the frantic efforts of governments and firms to restore confidence. Everyone is taking, if anything, too little risk", says Kelly and argues that fear can lead to unreasonably high levels of risk aversion.

In this context, he refers to the Asian disease problem. In 1981, Amos Tversky and Daniel Kahneman (picture) showed that the way a risk is described strongly influences how people see it - the 'framing' makes all the difference (this work later earned Kahneman the Nobel Prize for economics). Says Kelly: "The Asian disease problem holds two big implications for anyone leading an organization today. One is the reminder that emotions drive our decisions, perhaps especially when times are hard. The second is that we need to be very aware of how our organizational culture affects those emotions. The way we each deal with uncertainty is strongly influenced by the people around us."

Please read the full article here.