Tuesday, January 29, 2008

Leadership when people are scared II

We have covered some of the physiological effects of being scared. These in turn create change in the heart and the mind. The heart sends signals to the brain affecting the way it operates. We get to a situation where we can't think straight and we soon have the sensation of this. Thought becomes difficult, in fact all we can often to is concentrate of the feelings, which makes the situation worse. Basically our cognitions become flooded and overwhelmed. There is a very good reason for this. Danger produces a fight or flight response, which is fine when there is an immediate physical danger present that we either need to get away from or confront quickly and overpower. However as our lives are a tad more complex than when these responses were required our system doesn't have a way of easily distinguishing between fear from immediate physical danger and the danger of loosing our jobs, or the perceived danger of new and uncertain situations. Our minds and bodies therefore react the way they were programmed; for the more binary threats that existed when the programming was set.
Anyway the issue is that because many people react to uncertainty in this way the important point here is that in this state people are in an emotional space not a cognitive one, so simply resorting to 'reason' and 'logic' is unlikely to work at least in the first instance. Next some smart (and not so smart) things you can do as a leader of scared people

Tuesday, January 22, 2008

Leadership when people are scared

Leading when things are good is an art. Leading when things are difficult and people are frightened is a whole different matter. When people are scared a number of physical attributes occur which leaders need to be cognisant of as it will affect the way people receive and process information and make decisions.

1. The first thing that most people become aware of is that their heart rate increases significantly. In extreme cases people report the feeling that their hearts were going to pound its way out of their rib cage.

2. The next sensation is that their eyes are wide and that their pupils are dilated. The effect of this paradoxically is that too much light enters the eye and they lose peripheral vision, having to actually stare directly at things to see them with any clarity. This is in acute cases becomes tunnel vision and people find it hard to fix on any one thing with their eyes having to flit between things, often not long enough to take in any detailed information.

3. Their hearing becomes more acute, hearing things in greater clarity. However like the vision there is a paradox here in that whilst the hearing becomes sharper it also becomes more selective, taking in only certain information it deems to be part of the threat, excluding other sounds. People are often unaware that their auditory faculty has changed.

4. Physically people frequently report a range of affects including inability to walk properly, sick / knotted feeling in the stomach, tense muscles. In extreme cases the individual may find that they have lost the ability to talk.

Given these responses it is not difficult to see why leading people in this state takes something very different to normal situations, especially when you add the fact that the reason people are in a heightened emotional state is because either things are uncertain or difficult in some other way. However I have to say it is usually copious amounts of ambiguity coupled with some form of threat that flips people into negative emotional states. So is it is an uncertain situation that has risk associated with it, the leader is also likely (depends on the individual) to be under stress and not performing at their best which compounds the issue, which is why we tend to develop the emotional resilience of the leader(s) first before getting the team into a more resilient place.

The next blog will look at some things a leader should and shouldn't do in these situations.

Monday, January 21, 2008

Fear, Emotional Resilience & Risk Aversion

With in less than 24hours of the last blog about risk aversion and recession this happens based on fear, the perception that something might happen.
One of the things that we discuss on our workshops is the role of fear in risk aversion and behaviour.
Fear is a largely anticipatory activity; rarely does it occur after an event. Quite often with our fear we bring about the very event we don't want to happen, as discussed yesterday. An analogy if you like is learning to ride a motorcycle. When learning to ride the thing that most learners find difficult is cornering as you have to lean into the corner and until you get used to it , it feels like a pretty unnatural position, especially if you are used to driving a car. What learners then do is have a fear of running off on a bend and as a result of which they fix their eyes on the kerb, where they don't want to go of, just to check that they are not getting too close. Of course you tend to aim for where you are looking, the fear in this case increases the chances of running off on a bend! Experienced riders on the other hand fix their eyes on where they want to go, around the bend and they look for the exit not the thing they don't want to happen. As a result they can get around much faster and safer.
Fear makes us aim for the thing we least want. The acronym for fear is
How many things have you been scared of that turned out to be nothing? It leads to risk aversion and often brings about the very thing we don't want to happen.
If everyone decided that the market was ripe for investment and opportunity the market movement would be very different. When fear is endemic things start to go badly wrong as fear feeds of fear.
I am sure most of us will remember as a child being in a group telling ghost stories. As the stories build so does the group fear until eventually someone actually sees a ghost and everyone runs screaming! Group hysteria.
This is the reason why emotional resilience, as opposed to intelligence is so important, which is the cornerstone of our workshops with people like the emergency services, disaster managers et al.
There is nothing that exists now that didn't exist last week in the financial market. What is happening is based on an emotional reaction (or lots of them) feeding off each other in a fear frenzy. Tomorrow should be interesting.
It may not have escaped anyones attention that many wars start similarly.

Sunday, January 20, 2008

How increasing risk aversion leads to recession

Risk aversion is not a stable phenomena. It can increase and decrease depending on individual's and / or organisation's perception of their environment. Take for example a well known trend of many individuals to engage in more risky investments and gambling depending on their perceived level of wealth. So the better off they feel the less risk averse they become increasing the chance that they will engage in more risky investments, and speculative spending. On the other hand the less well off an individual feels coupled with perceptions of reduced opportunities for income generation the greater the increase in risk averse activities and behaviour.
The same is true for institutions and companies. When they anticipate difficult conditions they frequently become more risk averse, tightening boundaries and procedures, reducing innovative practices, and cutting costs, training etc and reducing productivity. Every organisation that starts to engage in risk averse behaviour accelerates the possibility of more organisations perceiving a threat and engaging in risk averse behaviour and so on.
Take for example the current credit crunch. A perception of increased risk in the market triggers the banks to reduce lending and start to call in existing loans, thereby weakening the quality of their existing assets. If this thinking catches on, which it usually does, as every bank watches each other, triggering a follow-my-leader spiral increase in risk aversion accelerating a slide into a recession.
So why do banks, organisations and individuals all contribute to the situation they fear the most?

The first thing to note is that the the situation has moved from one of a perception of stability, confidence in knowledge, apparent low risk and growth (a positive condition) to one of uncertainty, a lack of belief and confidence in the level knowledge held which heightens the perception (belief) of the possibility of decline (a negative emotional and cognitive condition), therefore a belief that the situation is high risk and disinvestment follows.
The uncertainty here that triggers a panic (recession) is that people find themselves in a situation where they have no way of analysing the situation, either because it is wholly new or the complexity of it prevents normal rational analysis, or the form of analysis is currently too immature ie no prior experience in this situation. In other words the belief in the knowledge they hold moves from one of more certainty to one of less certainty. The situation is compounded because people see that others are also uncertain and their beliefs are confirmed.
This uncertainty means that people are less likely to ignore worrying data than before. Any sign of problems in such situations are more likely to trigger disinvestment and risk averse behaviours than in situations where there is a confidence in the knowledge held.
The scene is set as people are watching for any signs of disinvestment, whilst preparing for action just in case. One event can then set off a chain reaction. Slow at first the reaction then increases in speed and ferocity as each event increases the uncertainty and risk aversion increases as panic ensues.
As each agent is acting individually rather than communicating and working on the situation collaboratively their emotional and rational involvement is one of self preservation rather than that of systems thinking. So increasing risk aversion helps to contribute to recession, particularly in, but not confined to the financial sector.
Makes you feel a whole lot better!

Saturday, January 12, 2008

An interesting quote that has nothing to do with risk management / aversion...

Success consists of going from failure to failure
without loss of enthusiasm.

-Winston Churchill

Yin & Yang of Risk Management and Opportunity

I am doing some work with a large multi-national at the moment, having been asked to run some workshops by the Risk Management Group of the company. The intention behind the workshops for the group was to make more of the organisation risk aware. As you can imagine this was an interesting proposal for me, kind of poacher turned game keeper. I decided to take the job and do something a little differently. I devised an exercise that really turned their heads. Here is the exercise and the results. It worked like a charm after a few tweaks:
I divided the group into two sub groups at random and gave each group the same selection of quality newspapers (Financial Times, The Times, The Independent and the Guardian) for that day. I had high lighted the same stories in each and asked them to go to different rooms and read the stories.

Now remember the context, these people are on a risk awareness workshop - the aim being to get better at identifying risk.

I went to one group and asked them to identify as many risks to their operation as possible in the articles chosen and then to choose 3 more articles that contain risks for the company and do the same analysis.
The second group I gave exactly the same instructions to with one exception;to identify all the opportunities that exist in the chosen articles and then to find three more articles that they believe could present real business opportunities for the company.

Then came the cute bit. I moved each group the the others rooms to comment on their analysis without telling them that they were engaged in different activities. Oddly two of the articles they had chosen were the same!

The energy of the two groups were noticeably different. The opportunity group had a lot more energy were having fun, were enjoying the task and were really enthusiastic. The risk group on the other had had a marked lower energy, were doing their task seriously and at one point complained that the opportunity group weren't taking the task seriously.

The group who were looking for risk described the opportunity seeking groups work as not critical enough and the opportunity group were struck by the negative tones of the risk groups work. Indeed so powerful was this that the opportunity group asked if they could leave the risk groups room as they were finding the whole thing depressing.

The opportunity group produced about 4 times the number of ideas as the risk group did and just from the sheer amount of work produced in terms of writing produced roughly twice that of the risk group.

We have now run a number of these workshops with almost zero variation in results. The managers are really starting to think about the effects of risk averse behaviours. The interesting thing is the company has now taken some of the people from the risk management group and formed a new group called Business Growth with that group managers title now being Head of Opportunity. The Head of Risk still remains in an altogether greyer office!

Risk averse innovation

A number of research surveys including this report in Management Issues highlight the link between risk and innovation.
The ability to think new thoughts, try new things and innovate requires that we break out from the thinking and practices of now. There is a saying
If you always do what you've always done you always get what you always got.
in other words if you want something different you have to do and think different things. The issue here is that in order to do something different takes nerve. To do and think like everyone else, as we have before, may give comfort and make us feel safe, part of the pack. However if we want innovation we have to risk being different, not part of the crowd.
Part of the report mentioned above quotes George Davie, a Managing Director of The Hazelton Group, an Archstone Consulting company:
The survey also found that having a culture that does not foster risk taking was the biggest impediment to innovation.
Basically innovation requires risk taking, the ability to stand out, to think, be and look for difference. Risk averse attitudes brings at best adaption and slow change, making sure that every step is thought through and makes 'sense' - by the thinking of now.
How many organisations reward difference? How many leaders promote real risk taking? How many managers expect and are happy to allow errors and mistakes to be made? Deciding that we need innovation means opening the doors to errors. As any innovation is new there is no knowing what will come up and whether any particular innovation will work or what effect it will have. Indeed many don't, at first at least and need to be played with, tweaked and allowed to mature. For every successful innovation there are many, many ideas that never make it. People who want innovation must be or must become comfortable with ambiguity and risk. The mindset of minimising risk will reduce the appetite to trial and error, experimentation and will stifle innovation. In organisations around the globe the wish to 'just make sure' holds them back. In fast moving and ever changing markets and conditions playing safe is anything but.

Wednesday, January 09, 2008

Monday, January 07, 2008

Sleep on it

A small break from risk aversion. I was talking to a friend today about problem solving. She asked me how I solved problems. I said I have a number of different approaches, it depends on the nature of the problem and started to rattle though a few methods. She stopped me and said no, I don’t mean like that. How do you solve the problems you don’t know how to solve?

Damn good question. I thought about it for a minute and then realised I sleep on it. I have a note book by the bed and before I go to bed I ask my mind to solve the problem I am working on. I then go to sleep. I usually awake with an answer. This also works for when I loose something. If I don’t have it by the next morning I usually have the answer in a couple of days.

I then came across this report later on about an inventor who dreamed a solution. Sleeping on it can be considered to be a viable and valid method of solving problems.

I just wonder if this is better for certain types of problem than others and if it works for everyone.

Risk aversion IV - Gender

Are men or women more likely to be risk averse? There are a couple of studies. The first by Jianakoplos & Bernasek (1998) found that single women display more risk averse behaviour than single men when choosing financial products. Men were significantly more likely to hold risky investments than women.
Other research (Bajtelsmit and VanDerhei, 1996; Hinz, McCarthy, and Turner, 1996) found that women tend to (not all women) invest in more conservative - less risky pension arrangements. This means that on average they will get more modest returns compared to most men, however less women tend to loose their investment as a consequence.
However in a project that examined men and women leaders working together in a simulated takeover scenario Gadsby & Maynes (2003) found that there was no significant difference in risk taking when making decisions. However when the men and women were seperated and little feedback was given about the performance of their actions men tended to continue to make riskier decisions. The researchers conclusion was that women tend towards conformity more than men.
Just remember I only reported the research I didn't do it!

Jianakoplos, N.A. & Bernasek, A (1998) Are women more risk averse? Economic Inquiry 36 (4), 620–630.
Gadsby, C.B. & Maynes,E. (2005) Gender, risk aversion, and the drawing power of equilibrium in an experimental corporate takeover game. Journal of Economic Behavior & Organization Volume 56, Issue 1, January 2005, Pages 39-59

Sunday, January 06, 2008

Risk aversion and ambiguity

Just a quicky - someone has just asked me why I am writing about risk aversion when my main area of expertise is ambiguity.

The quick answer is that risk aversion is usually seen to be part of an individuals level of tolerance to ambiguity. Thus the link in the previous blog about risk aversion being a reaction to uncertainty.The inference being that people who aren't comfortable with ambiguity or uncertainty tend to display risk averse attributes. Therefore risk aversion is an important area of the research on ambiguity.

Risk aversion III - the lottery and insurance

Risk aversion is of great interest financially. If we can model risk aversion or better put risk taking accurately it opens up the possibility to be able to work out for instance:
  • What risks a person offers for personal insurance purposes and therefore whether an individual should be insured or what premiums they should pay. Here risk aversion is seen as a positive, insurance companies want risk averse people as clients. It is less likely that you will have to make a payout with a risk averse person as opposed to a risk taker. Or are they? Are risk averse individuals safer?
  • The other side of the insurance coin and risk is how likely the individual is to take out insurance anyway. So it might be that the more risk averse you are the more likely it is that you will buy insurance.
  • Investment companies want to know how risk averse an investor is so that they can sell the appropriate products. Indeed in investment terms risk adversity is described as how much risk an individual will hold for the likelihood of similar returns. The most risk averse tend to go for things like building societies or premium bonds where they are either guaranteed a certain return or at least their money back.
  • One angle of economic risk looks at whether an individual actually saves 'for a rainy day' or just lives for today with the expectation that their income will continue.
  • Another angle of economic risk is what people will do to earn money. Are they most likely to be employed, self employed or casual or even work in the black economy (prostitution, drug selling, selling things for cash outside of the state taxation system for example).
  • Gambling is another financial risk activity. Now where the line is between gambling and investment and speculation is a fruitful area for discussion. However there are more and less risky gambling activities.
It is tempting to say that a risk averse person will be:
  1. Good to insure - least likely to engage in risky activities and therefore have accidents
  2. Most likely to want insurance - least likely to risk being uninsured
  3. Most likely to save regularly - least likely to spend, spend, spend.
  4. Will tend to save in 'safe' institutions - as opposed to making high risk investments
  5. Most likely to be in employment in a safe job - least likely to engage in high risk or illegal occupations
  6. Unlikely to gamble, however if they do are most likely to go for safe bets like the premium bonds.
Most of the financial risk modeling, as you would have expected , is algebraic in nature as are the financial theories. For a good overview of these see the Theory of Risk Aversion website.

So are risk averse people risk averse in all areas of their lives or do they engage in paradoxical behaviour, taking risks in some areas and not in others?
For example are risk averse people safer because they don't engage in risk laden activities or does their risk adversity make them more of a risk because they are too cautious?

The answer appears to be yes! I will explain in the next blog.

Thursday, January 03, 2008

Risk Aversion II

So in the search for an answer to the question,

How much of risk aversion / risk taking is an individual perceptual issue and how much is as a result of cultural factors?
I would just like to say here and now that I do realise that separating the individual perceptual factors from cultural ones is a little like platting fog, however having engaged in similar processes before the process will offer up some interesting insights about risk aversion.

My first port of call was wikipedia - OK I'll admit not the most academic of starts, that comes next but in reality it's not a bad place to start when you see who some of the contributors are.

The first interesting thing is that the opening paragraph firmly gives an individual explanation:

... related to the behaviour of consumers and investors under uncertainty. Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with a more certain, but possibly lower, expected payoff.

This to me is at first sight an individual explanation. The interesting thing here for me is the link being made with uncertainty. A causal relationship is being suggested - risk aversion is associated with uncertainty. Hmmm. Lets see.
Anyway back to the question just because there appears to be an individual explanation for risk aversion it doesn't give an indication as why the individual might react to uncertainty like this. How much of this is innate and how much is socialised? Do we naturally react to uncertainty by becoming risk averse?
Ok I'm off to plat more fog....

Perception of risk

Odd thing risk. I was talking to a group of friends yesterday about business. One of the group, a teacher was very quiet for a while as the conversation continued about the various businesses a number of the group are running, what their current challenges are and how they are building new business. The teacher eventually broke her silence and said "I just don't know how you do it. You are all risking so much. I couldn't take that kind of risk. What if your ideas don't work?"
The rest of the group just looked at her for a few seconds blinking. The first person to break the stunned silence said "Actually I see what I do as far less risk than you run being employed. I am my own boss and what happens is in my own hands. If you get a new boss or a new minister or a new government policy you have to go with whatever someone else decides. You have no real say in what happens. If you get good bosses then great if you don't then you have no power. No that for me is a real risk. I can't imagine why I would want to risk my future on someone else making the right decisions."
Today I was party to a different discussion about risk at an investment bank I work with. There was a stock that had been doing well during the morning. One investor was making money on the stock whilst another had decided not to invest because he didn't know enough about the company to make a good judgment. I asked the first investor what he knew about the company involved and he admitted that he knew very little but the opportunity existed in the movement and not the company. The second just shock his head and wandered off. When I caught up with him he laughed and said he needed to know he was going to win as the thought of the potential losses of getting it wrong was just to much. He dubbed it professional suicide.
This began a train of thought. If risk is perceptual are the perceptions catching? Is risk aversion or risk taking purely a personal issue or can it be 'transmitted'?
In organisations where risk aversion is a theme is it because they recruit and foster risk averse people or do people mediate their behaviour and thinking based on the prevalent atmosphere? In effect how much of risk aversion / risk taking is individual and how much is cultural?
Stay tuned as I will report what I find.

Wednesday, January 02, 2008

Emergent properties

Odd, as I was writing the last blog I recieved a copy of an article published this week in the Economist called The Accidental Innnovator. The argument behind the article is that leaving yourself open to 'stumble' upon emergent properites or in the articles language, 'accidents' is what produces innovation. It goes on to say:

Evan Williams (originator of Blogger and Twitter) accidentally stumbled upon three insights. First, that genuinely new ideas are, well, accidentally stumbled upon rather than sought out; second, that new ideas are by definition hard to explain to others, because words can express only what is already known; and third, that good ideas seem obvious in retrospect.

The article then talks paradoxically about planning to make happy accidents happen. They do things like asking what can we take away to create something new rather than the usual what can we add? A really nice example of the paradoxical thinking of this and that I was trying to describe in the last blog.

There is also a brief discussion about the positive role of frustration in innovation. Which is often the opposite to conventiaonal wisdom of minimising frustration.

The point is that here is a nice example of someone using paradox to be innovative and find the emergent properties inherent in a situation rather than managing the situation so tightly that accidents can't happen and no new properties or innovation can emerge.

Loosen up and innovate!

2008 - the year of the paradox

Happy New Year.

Blogs, websites and news agencies have moved from their reviews of the year to predictions of what will be in vogue in 2008. I am not sure that I want to fall into the same trap of making predictions virtually all of which I (nor anyone else for that matter) have no real idea will come to fruition. The art of forecasting, predicting what will happen next is usually based on what we already know to the the case now. Largely these are based on research that is ongoing and have some trends already, trends that are happening now and are then projected. The front page of this months Focus magazine (the BBC science and technology magazine), for example has a very informative article and a prediction about the future for power based on a new breed of steam engines. We appear to be very good at pulling a series of not quite disconnected facts together and making an extrapolation to project. Now this is a very useful trick that allows us to have visions of the future and then work to make them so. Everything that we are all working on now is based on this ability. Our cognitive ability to perceive patterns, extrapolate and project them is part of what makes us, us and drives 'progress'.
On the other side of this fantastic ability is the problem that it also constrains our vision, makes us miss even the most obvious competing thoughts and ideas and frequently creates the conditions where we cancel out ambiguities. The idea that steam driven engines are about to come into their own for personal power, for example in cars, whilst an interesting intellectual exercise misses a few issues that at the moment makes this not the most practical solution to our growing energy crisis.

This isn’t a critique of an article on steam driven personal transport, it is intended however as a illustration of the opposite side of our abilities. One of the things that has struck me in the last year or so is how everything has an opposite and equal. This has become a bit of a theme. Now I admit this is not an original thought as I am discovering. The earliest known text dates back to 300 years before Christ and are usually attributable to Lao-tzu, (580-500 B.C.), it is believed to predate him by several centuries.

I bought a book for a friend for Christmas called ‘Change your thoughts, change your life’ by W.W. Dyer. Whilst the title didn’t do much for me I knew that she was ‘into this kind of stuff’. I am a little hooked and have stolen it back!

The book opens with a quote from George Bernard Shaw

Progress is impossible without change, and those who cannot change their minds cannot change anything.

Anyway, the first chapter introduces the Tao with the first few lines from the Tao Te Ching and “Lao-tzu tells us that the “Tao is both named and nameless.” This sounds paradoxical to our western intellect – and it is! (sic)”

He then goes on to describe how our western thinking highlights and maintains opposites as opposing thoughts and that the eastern Taoist thinking embraces such paradoxes as part of the same entity allowing both to exist side by side.

(These are my thoughts) It’s sort of dualist thinking (this or that) and holistic thinking (this and that). Dualism separates and makes one side oppose the other. If we think or see something it is usually to the exclusion of the opposite. Paradoxes become confusing and something to be resolved, preferably by working out which side of the paradox is right. This line of thinking come about because we think in ‘facts’ and facts have to be right or wrong (hence dualism, this OR that). The problem is that when exploring what the reality of a situation is this type of ‘factual’ thinking leads us to miss things as we only look for what fits.

I recently went to a (very expensive) workshop given by a consultant in complexity. Much of the workshop was spent hearing his opinion of what were good and what were bad theories, people, books and ideas. Whole books and ideas were dismissed with the wave of a hand because they weren't 'valid'. I was a little struck that when considering complexity, which I have written about in 'The Ambiguity Advantage' the idea of dismissing things because it doen't fit seems a little like buying an Ikea wardrobe, emptying all the bits on the floor from the box and throwing some of the bits away because they don't look right before waiting to see if you need them.

The eastern condition is this and that. Both are true at the same time. If this is true then that (the opposite) is true as well. What this means is that with such thinking exploring the reality of a situation we look for what fits and the opposite at the same time not only allowing both to exist but seeing what emerges from the existance of competing ideas. The central tenat of complexity theory is allowing things to be enough, without over managing them to find the natural emergent properties. It is these that give complexity practitioners the edge.

Many failures in decision making and problem solving occur not because there weren’t enough facts, if anything there are often too many (of one type), but rather because of the facts we were disallowing because that don’t fit or make sense.

How many of us, and I include me in this, have dismissed someone (some book, some article) and their thinking because they aren’t making sense? We make this decision before really hearing what it is they are trying to communicate. Logic is judged to be logical if we understand and agree with it, i.e. it fits with our system of logic. If it doesn’t fit with my / our system of logic then it is deemed to be illogical. The idea that only one can be true may just mean that we are missing something and narrowing our thinking.

2008 - embrace a paradox.