Monday, December 29, 2014

Making Sense of Risk Tolerance

Risk tolerance is both challenging and complicated, and there are plenty of moving parts.

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Personalities, past experiences, fatigue and mood have all been shown to affect a person’s tolerance for risk. Other than trying to change individuals feelings toward risk taking, a new post from The RAD Group says there is a lot to help minimize risk tolerance in any given context.

The piece presents the idea of "local rationality" and states that actions and decisions are heavily influenced by the factors that are most obvious, pressing and significant in immediate context - people do what makes sense in the moment. The piece also suggests that when people are in a position of power relative to others in their context, they tend to be more risk tolerant.

However, if the person in power also feels a sense of responsibility for the well being of others in that context, s/he becomes more risk averse. The article uses parents as an example, as they are power-position relative to their children and aware of their role in protecting them, so they they are less likely to do risky things. "If you want to limit the effects of relative power-positioning on certain individuals’ risk tolerance – think supervisors, team leads, mentors and veteran employees – help them gain a clear sense of responsibility for the wellbeing of others around them," the post says.