The 10 most predominant attributes of Mode II people

In terms of population distribution by far the most frequent group of people are mode two or co-operative people. Approximately 55% of the population have a tendency towards a co-operative thinking system (What is a mode?).
So what are the attributes of a mode two logic system?
1. The first thing of note about mode two or cooperative people is that they see value in other people. There is a realisation here that two heads are better than one and you need to work with people, a) to get things done, and b) to make things better. What underpins this largely is the mediation of risk. There is safety in teams. "If I make a decision on my own and it is wrong there is only one person at fault. If I make a decision based on a collection of others ideas that they agree with and 'we' are wrong, then that is less of a personal risk to me.
2. Democracy is the usual method of decision making here. Everyone has a vote and the majority win - except when they don't! Co-operative leaders / managers will usually reserve the right to make the final decision. This will in all likely hood be similar to the majority view but not always.
3. There is usually a collective wish / need to reduce risks as much as possible. So you find lots of structures like competencies etc. in mode two organisations as well as other risk reduction behaviours / thinking.
4. There is a distinct focus on task here. In mode two organisations the task is the focus. There is a little emphasis in modal mode two on process in as far as it effects the task. What I mean by this is that things like 'team building' and the reduction of conflict are highlighted activities in mode two environments. This is to ensure as far as is possible that the task gets done with the minimum of friction.
5. Friction is usually defined in this logic system as being anything or anyone that is percieved to get in the way of or slow down the completion of the task.
6. Cooperative problem solving approaches are the big feature here. Two or more people working together to solve a problem. It does not matter what the people involved believe, indeed people in this system are largely expected to work regardless of their beliefs. The prevailing thinking is, you are paid to work so work. If the people working together don't believe in the task they are just expected to get on with it, unlike as you will see mode three systems.
7. Using others as resources is really the name of the game - cooperate to get the job done.
8. As mentioned above mode two people really don't like conflict. In the workplace great effort is taken to reduce interpersonal conflict or better still to stop it happening. Conflict is seen as unproductive and an unnessessary distraction. It also (importantly) doesn't feel good.
9. Emotional resilience in mode two is pretty low to average to say the least. More about this in a later post.
10. Ambiguity and uncertainty is to be reduced. A lot of effort and money is used (often unsuccessfully) to make things simple and clear especially in mode II organisations. Ambiguity is seen as the nemasis of productivity.

Risk aversion research

Whilst teaching at the Medical Sciences Division at Oxford University this week I came across a young D.Phil student conducting some very interesting research into risk and risk aversion in humans through the lens of medical perspectives of gambling addiction. Now clearly I am not going to pre-publish someone else's research, and especially not a student's, however the conversations we are having and the other research we have discussed are available to share and they throw an interesting light on risk averse behaviour, ambiguity and emotional resilience.
First I just want to reiterate a couple of things that I have mentioned before; Risk aversion is an emergent property of an individuals emotional reaction to a situation that is perceived to be ambiguous or uncertain, and that risk averse behaviour is usually different depending on whether the risk is considered to be risk of a gain or risk of a loss. Normally are more willing to take a risk if they believe there is a potential large win and a small loss. Which is why many more people will risk a few pounds or dollars on only a 14 million to 1 chance of winning the lottery (and almost certain to loose their money) without thinking and yet won't engage in stock ownership even though the likelihood of profiting is far greater in the latter scenario.
So most people have a natural tendency to avoid loss. This is that case whether the loss is financial, personal - like a job, role or position or social like a relationship, often suffering sever hardships rather than loose something like a bad relationship or a job they don't like.
The risk aversion in these cases are anticipatory, the loss hasn't actually happened and cold calculations of probability rarely affect the emotional reaction. (Which is why we often concentrate on emotional resilience in our workshops and coaching).
To be continued...

Risk aversion and the law of unintended consequences

The news that the UK Credit card company EGG is about to withdraw 161,000 credit cards from customers who are considered to be 'higher risk' is an interesting case study in risk aversion.
On one level their actions make a lot of sense for the company. If they are actually targeting individuals who propose a higher risk (and there is a question about how they have made this decision) in times of economic slowdown then restricting their ability to get into debit does reduce this companies exposure to risk later on - but only if other companies don't do the same thing.

In times of tougher money and in particular credit supply reducing peoples flexibility to move (and access) money around is very likely hasten the levels of bankruptcy. If you are in a tight spot and your emergency supply (the credit card) dries up and there is no way to get more money meaning you can't pay your debts then you will go bankrupt and then default on everything. This means that if every credit company, as is widely expected, follows suit, then this is quite likely to accelerate the numbers of payment defaults which is they very thing the strategy is trying to prevent.

This is a typical mode one (from the book the Ambiguity Advantage more of which later) risk averse reaction. When things look difficult more controls are put into place. Logically this appears to be the right thing to do. 'Things are going to be tight so we will reduce spending (or in this case the ability to spend) across the board'. That makes sense for the individual credit company. However if everyone does the same thing, the more they all control the money supply the less there is to spend, the less there is to spend the less people buy, the less people buy the less profit there is, the less profit there is... you get the picture.

So a risk reduction strategy that works for one company for a limited time, when copied and used widely is likely to actually bring about the very conditions they are trying to prevent.

This is also true within companies. Many companies that we have seen, cause themselves problems when things get tough by reducing spending / effort on the wrong things. So at the very moment when things need to change and employees need to think differently, get creative and find new ways of doing things you find that activities like better training and development, coaching etc, are usually slashed thereby exacerbating the situation.

Risk aversion often brings about the very thing we are trying to prevent.

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
False
Evidence
Appearing
Real
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.

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!

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.

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.

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.