Managing Risk- The Human Factor

Human Factor Risk "

Geoff Trickey & Grace Walsh
Psychological Consultancy Ltd.

The Risk-Type Compass®

•  Personality tool

•  Explores an individual’s
–  predisposition to risk
–  capacity to manage risk
–  decision making

•  Based on globally validated research

•  Assigns people to one of eight Risk Types

Original Development
•  Developed to advise clients on investments

•  FSA requirement to assess client’s propensity
towards risk

•  Incorrect measures of risk tolerance may have
contributed to ﬁnancial crisis (Sjoberg &
Engelberg, 2009)

•  Personality based measures of risk tolerance
previously overlooked

Parallel Assessment Universe

Human Factor Risk Assessment has been:
1.  Based on a ‘snap shot’ of attitudes
2.  Varied approaches with no consensus
3.  Muddled and inconsistent

Content: temperament? situation? circumstances?
Methodology: deﬁnitions? models? taxonomies?


The Importance of Personality
•  Personality questionnaires tap into:
–  Innate levels of fear and anxiety
–  Need for predictability
–  Impulsivity
–  Desire for excitement

•  Deeply rooted ‘dispositions’
•  Stable basis for decisionmaking

Risk & Personality

•  The signiﬁcance of FFM
•  Deﬁning the domain
•  Consensus at last
•  Consistent over working life
•  Deeply rooted


The Five Factor Model
•  Higher extraversion is associated with higher
risk tolerance (Pan and Statman, 2009)

•  Why?
–  Extraverts need stimulation (Eysenck, 1973)
–  Sensation seeking aspect is a strong predictor
of risk tolerance (Harlow and Brown, 1990)


•  High conscientiousness is signiﬁcantly
associated with having a lower risk tolerance
(Pan and Statman, 2009)

•  Why?
–  Need conformity and control (Hogan and Ones,
1997)
–  Less tolerant of uncertainty, change and innovation
(Nicholson et al., 2005)
–  Individuals that are hasty, impulsive, careless and
impatient are more likely to want to take risks than
those without these characteristics (Kowert, 1997)

•  High scorers on neuroticism are
signiﬁcantly related to having lower risk
tolerance (Nicholson et al., 2005)

•  Why?
–  Less resilient (Nicholson et al., 2005)
–  Focus more on threats (Eysenck, 1992)
–  Interpret ambiguous stimuli as more
threatening (MacCleod & Cohen, 1993)
–  High fear of failure (Elliot & McGregor, 1999)

•  Higher scores on openness to experience
are signiﬁcantly associated with having a
high risk tolerance (Hunter and Kemp, 2004)

•  Why?
–  More tolerant of uncertainty and change
(McCrae and Costa, 1997)
–  More adventurous and imaginative
–  Search for new experiences and actively seek
out risk (Kowert, 1997)


•  Agreeability -The least predictive area of
personality for risk

•  Only two studies have found signiﬁcant
relationships

•  Highly agreeable individuals fear the harm
that could come to others through their own
risky behaviour (Kowert, 1997)


Extracting the Risk Elements
RISK RELATED THEMES
•  Adventurous
•  Forgiving
•  Apprehensive
•  Impulsive
•  Attachment
•  Methodical
•  Careless
•  Optimistic
•  Compliant
•  Patient
•  Conﬁdent
•  Perfectionist
•  Conforming
•  Reckless
•  Deliberate
•  Resilient
•  Emotional decision making
•  Sentimental
•  Excitement seeking
•  Spontaneous
•  Focused
•  Trusting

Subtheme Factor Analysis


Four ‘pure’ Risk Types…….


Two Inﬂuences on Risk-Taking

Fear:
Impulsivity:

Nervous vs Fearless
Prudent vs Carefree
Apprehensive vs Relaxed
Compliant vs Challenging
Brittle vs Flexible
Consistent vs Unpredictable
Pessimistic vs Optimistic
Detailed vs Vague
Vulnerable vs Daring
Planned vs Impulsive
Stressed vs Calm
Organised vs Approximate


The Risk-Type Compass®

•  Eight Risk Types
•  Continuous spectrum
–  Adjacent Risk Types similar
–  Facing Risk Types opposites

•  Markers (•) for extreme
types are placed at the outer
edge, moderate types near
the centre
•  Central 10% Typical


Eight Risk Types
•  SPONTANEOUS
•  DELIBERATE

Uninhibited, excitable, unpredictable and
Imperturbable, conﬁdent and systematic
distraught when things go wrong.
they are fearless and well unprepared.

•  INTENSE
•  COMPOSED

Enthusiastic and committed, but pessimistic
Calm, cool headed and optimistic they
and easily defeated by set-backs.
seeming oblivious to risk.

•  WARY
•  ADVENTUROUS

Well organised but, anxious and fearful of
Calm and unemotional but impulsive,
failure they passionately seek to control.
daring and up for any challenge.

•  PRUDENT
•  CAREFREE

Cautious, self-controlled and most
Unconventional and excitement seeking,
comfortable with continuity and familiarity.
their imprudence makes life exciting.


Prevalence of Risk Types


Risk Attitude –variable
•  R-TC also recognises the significance of
risk attitudes

•  Influenced by experience, training, current
climate or personal circumstances

•  Focuses on five key domains addressed by
research
–  Financial, health & safety, recreational, ethical
and social (Weber et al., 2002; Blais and Weber,
2006)


Risk Attitudes


Type & Attitude

RISK ATTITUDE

RISK TYPE


Risk-Type Compass® Model
•  Measure of Personality – Risk Type

•  Measure of Attitude – Risk Attitude

•  Measure of Tolerance – Risk Tolerance
Index


Risk Tolerance Index (RTi)


Quality of Measurement


Reliability


Calm – Emotional (Fear)


Daring – Measured (Impulsivity)

28

Validity Studies
•  Risk-Type Compass® & Proﬁle:MATCH®
(Stewart, 2011)


Validity Studies
•  Risk-Type Compass® & the Hogan
Personality Inventory (Stewart, 2011)


Validity Studies
•  Risk and Creativity (Cichomska, 2010)

Used the Creative Personality Scale (Gough, 1979)

Positive correlation between creativity and risk tolerance


Validity Studies
•  Risk and Security (Gordon, 2010)

Need for Security negatively associated with Risk Tolerance Index


Our IT Sample


Our Engineer Sample


Our Recruiter Sample


Our Auditor Sample


Differentiation

IT PROFESSIONALS
RECRUITERS

ENGINEERS
AUDITORS


Gender Differences
Risk
Types
of
males
and
females

Males
n=843,
Females
n=656

20

18

16

14

Percentage
of
sample

12

10

Male

8
Female

6

4

2

0

Wary
Prudent
Deliberate
Composed
Adventurous
Carefree
Spontaneous
Intense

Risk
Type


Spheres of Application Include:

•  Project Management
•  Certiﬁcation
•  Risk Management
•  Financial Planning
•  Compliance
•  Team Building
•  Underwriting
•  Risk Landscape
•  Coaching
•  Risk Culture


Individual Level Applications

•  Selection

•  Re-deployment

•  Personal development

•  Advising in ﬁnancial services


Team Level Applications

•  Reveal the team composition - Who is Who?
•  Clarify team dynamics
•  Increase cohesion and effectiveness
•  Raise team-awareness of propensity for risk
•  …and awareness of others
•  Balance risk taking tendencies
•  Enhance decision-making


Organisational Level Applications

The Risk-Type Compass® in survey
mode:

The Risk culture

The Risk landscape


The Company Risk Landscape

SALES

RTi 96
PROMO
EXEC I
THE BOARD EXEC II
ACCOUNTS
& EXCO

HR
FINANCE

RISK &
COMPLIANCE

Rec
L&D

Risk and Compliance Team


Individual Summary"


Risk Culture Modeling


Positive Risk Management
•  The world needs risk takers:
•  Entrepreneurs
•  Creatives
•  Sales people
•  Heroes
•  Challengers of the status quo
•  Enron vs Kodak – two ways to fail
•  Risk Culture & Friendly Fire
•  Manage for more risk as well as for less?


THE END

Tel: +44 (0) 1892 559540
Email:
geoff@psychological-
consultancy.com


Managing Risk- The Human Factor

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