In a VUCA world, you need to understand volatility and uncertainty.\u00a0 Yet even CEOs, CFOs and senior business people I work with are ignorant of some of the basics of risk and probability,\u00a0<\/strong>which can make them the “sucker” in the game. (In poker, we say if you can’t spot the sucker at the table, it is probably you!)<\/p>\n This short post is excerpted from The Science of Organizational Change<\/a> – the first book on leadership and change to introduce probabilities, risk, and cognitive biases to the business community.<\/p>\n Also, listen to my podcast<\/a> with Annie Duke (poker pro, and business strategy consultant) on this topic.<\/p>\n Here is the chapter excerpt – from a chapter called Governance and the Psychology of Risk.<\/p>\n This century\u2019s research in psychology and economics has shown how deeply flawed human intuitions are especially about probability,<\/em> and this lack of intuitive savvy, and of risk education compromises the human\u2019s ability to make important personal decisions (for example, about health). In the business context, where the stakes are much higher, leaders need to build institutional and decision-making safeguards to protect their business (and the communities and environment they affect) from risk-oriented mistakes.<\/p>\n First<\/strong>, humans believe in trends and patterns in events that happen randomly. We believe in \u201cwinning streaks,\u201d \u201chot hands,\u201d \u201cdue for some rain,\u201d or that seven black spins increases the chance that the next spin will be red.<\/p>\n Second<\/strong>, we place our faith in small samples. Our exquisite pattern-finding apparatus causes us to leap to conclusions about the world based on flimsy data. An institutional sampling error in business is the \u201ccase study\u201d which although providing a textured analysis of a situation, cannot be extrapolated to other businesses without caution.<\/p>\n Third<\/strong>, in troubled situations, our attitudes toward risk change. Rather than hunkering down until the storm passes, we tend to get more aggressive and risk seeking. Suppose I offer you the choice of two boxes. One contains $1,000 and the other contains a surprise 50 percent of the time, it contains $2,000, and the other 50 percent of the time, it contains nothing. You take the sure thing; in fact, you might take $950 rather than a fifty-fifty chance of $2,000, giving up some economic value for some certainty. This is called risk aversion.<\/a>[1]<\/sup><\/a> However, when Kahneman and Tversky produced their famous paper, Judgment Under Uncertainty,<\/em><\/a>[2]<\/sup><\/a> they showed that in neutral and positive situations (things are going well, or as planned), risk aversion dominated. However, when things became difficult, risk aversion gave way to risk-seeking behavior. This explains why people who are \u201cstuck\u201d stay much longer in casinos than people who are \u201cup.\u201d When their stocks go down, people risk-seek to \u201cget it back.\u201d When change projects go awry, even sensible leaders can try desperate measures.<\/p>\nSeeing patterns that aren’t there<\/h2>\n
Not enough data<\/h2>\n
Trying to “get even”<\/h2>\n