Rational Versus Rationalized Risk Taking

Devdutt Pattanaik in his Economic Times article “Malady of Interpretation” narrated an interesting story from Mahabharata. Bhisma, leading the battle in Kurekshetra on behalf of Kauravas had the boon of death by wish. As he couldn’t be killed, Pandavas couldn’t win the battle. Then Krishna devised a ploy to trick Bhisma into lowering his bow. Pandavas knew Bhisma would not fight a woman, hence asked Shikandi, a transgender, to participate in the war. Shikandi was born a woman, hence Bhisma interpreted that he cannot shoot at a  woman, whereas Pandavas considered him a man. If Bhisma had rationalized that Shikandi was a man, Pandavas may not have won the battle.

Rational or Rationalized Risk Taking?

This is thought provoking; do we do rational risk taking or rationalize risk taking? Risk analysis is significantly subjective, and a whole lot depends on the judgment of the decision maker. The financial crises occurred as most financial institutions rationalized the risks of selling the CDOs as minimal. With hindsight, most question the decisions and fail to comprehend the rational for taking these risks.  Therefore, let us look at the situations that prompt us to rationalize risk taking.

1. Boss’s view

If the boss says so, most juniors will agree, even if the business decisions tantamount to jumping in a well. Depending on the organization culture and boss’s authoritative tendencies, juniors will rationalize risk taking decisions. Juniors show higher tendency to rationalize when they believe that their voice is not going to be heard, will be penalized for giving contradictory viewpoint or  rewarded for blindly agreeing to boss’s ideas.

2. Group think

When group think sets in, then tendency for rationalization increases tremendously. Group members agree for getting along and not rocking the boat. The attribute of looking at one’s own plans objectively and skeptically is completely missing among the group members. A voice shouting at the top of his/her lungs is also not going to be heard. On the other hand, anyone who gives a rational view may get attacked by the group members.

3. Self-interest

When we fall in love, we fail to see the negative attributes of our object of adoration. Our overwhelming pride in our ideas can make us believe our own hyperbole. There are many mountaineers who attempt to climb Mount Everest without adequate preparation and training, as they consider themselves unbeatable.  While passion and commitment is good, if a person is not open to debating their ideas, then it can become their waterloo.

Taking into account the extent to which social context, individual psychology and organization culture play a role in business decisions, it isn’t surprising that organizations are failing to manage risks. The devil is in the detail and management ideally should form decisions backed by data. But, quite often management takes decisions based arrogance, optimism and gut feel. Hence, rational thinking is compromised for rationalized thinking.

Therefore, other obstacle for rational risk taking is that it requires a whole lot of information. Usually, decisions are based on inadequate information and research. As Sun Pin says that to win a  war, the general should know strengths and weaknesses of his own army, the opponent’s army and the terrain. A general should draw the battle plan after taking all risks into account and get into battle only when victory is assured. However, in business this wisdom is ignored and business managers tend to rationalize while preparing corporate strategies.

Closing thoughts

The human psychology works on the premise that when we say “Mirror, mirror on the wall, who is the most beautiful of all?”, the mirror responds “You”. Dissenting and uncomplimentary views are hard to accept. The first reaction many a times is a desire to stuff something down the other person’s throat to stop their criticism and negative feedback. However, for rational risk taking the dissenting thoughts and critical feedback are worth gold. These prompt executives and risk managers to view strategies, business decisions and implementation plans dispassionately and objectively. Rather than deny the possibility of risks occurring by saying “this is not going to happen”, executives must ask – “how is this going to work?”.

One question for the readers – Can rational and rationalized risk taking co-exist?

References:

Devdutt Pattanaik in his Economic Times article – Malady of Interpretation

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One comment on “Rational Versus Rationalized Risk Taking

  1. I like your writing very much and these are interesting points however, I am not sure we can correct this problem unless we hold the general in command accountable for the outcome.

    In the case of Lehman’s brother’s for example, those that crippled the bank under the realm of Fuld, escaped without negative outcome. Actually they seemed to do quite well financially.

    Regulation needs to change the payout around from “Privatise Profits and Socialize Losses” but I fair that may never happen. Let’s see, none the less I like the blog.

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