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1. Introduction
Risk refers to the degree of uncertainty associated with the possible outcomes of a decision (Walker et al., 2003). Risk is inherent in nearly all business activities. Organizations are subject to distinct types of risk that result from financial decisions, investment choices and operational pursuits. Research on the financial risk resulting from financing decisions is most often measured objectively using evaluations of cost and capital structure (e.g. Oztekin, 2015). Investment risk analysis refers to the viability of projects, and within this context, risk analysts have developed assessment techniques that have evolved from classical deterministic models to probabilistic techniques. These forecasting methods, while quite useful when used for the allocation of organizational resources, often fail to account for an individual manager’s perspective. Instead, forecasting techniques tend to assume that organization decision makers who have similar demand projections and investment project cost estimates will behave the same way when making a decision. This assumption turns out to be problematic. It is entirely plausible that the ultimate outcome associated with an organizational decision can be shaped, in large part, by the willingness of individual managers to engage in risk taking behavior.
Over the past half century, there have been numerous studies devoted to describing, explaining and predicting various forms of business and organizational risk (Hoskisson et al., 2017). Even so, the risk literature has not yet consolidated. One reason for this lack of consolidation is that decisions involving operational risks are seldom addressed in the corporate finance literature. Those interested in corporate risk taking often use models that are devoid of individual decision maker characteristics, which can change based on specific industries, variability in revenues and operations costs, profitability and liquidity constraints.
This has created a gap in the literature. Little is known about how subjective manager characteristics and risk objectives are related or how these factors influence the decision-making process at the unit level (Cain and McKeon, 2016; Hoskisson et al., 2017). To date, no standardized model of decision maker level risk taking has emerged in the literature. The purpose of this paper is to help address this conceptual need by providing a theoretically grounded conceptual model of risk taking at the organizational level.
Drawing on behavioral decision theory and on Knight’s...