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Abstract
This paper examines managerial attitudes to risk in the UK to see whether managers are apparently "irrational" and focus on simple heuristics rather than concentrating on statistical outcomes in their decision-making processes. The findings reported here are based on a large postal questionnaire survey of UK managers in different functional areas. The results suggest that managers exhibit many of the biases that have been documented for executives in other countries. A focus on the framing of a decision, an emphasis on the magnitude of negative outcomes and an insensitivity to the probability estimates are all characteristics of the responses to the scenario cases provided.
Introduction
The standard textbook approach to risk and uncertainty in finance theory, which is based on variance, assumes that managers rationally consider all possible outcomes and weight them by their likelihood of occurrence. However, this approach is generally considered by decision makers to be of little practical value. Surveys of practitioners in various parts of the world have suggested that managers appear irrational and do not regard variance as a helpful measure of risk; they do not select a project with the highest expected outcome and the lowest standard deviation of outcomes as finance theory suggests. Instead they consider only the downside of the distribution as risky, tend to concentrate on the analysis of worst outcomes and view risk as a multi-dimensional concept which is not easily captured by a single number.
The aim of this paper is to investigate managerial attitudes to risk in a UK setting over a recent time period. A comprehensive questionnaire survey was undertaken and the results of this survey throw light on how managers define risk as well as identify those factors that influence executives' attitudes to risk. The remainder of the paper is set out as follows: the next section identifies the contribution of the cognitive psychology literature on risk and contrasts the findings of this literature with the standard financial textbook view of risk. The following section describes the results from analysing the questionnaires while the last section offers some conclusions.
The Contribution of Cognitive Psychology
The psychological approach to risk may explain some of the apparent irrationality that is present in managerial decision making. It draws upon the notion of...