Risk and decision making by Australian managers

© 2004 Dr. P. L. (Les) ColemanThis thesis uses risk in its dictionary meaning as the probability of an undesirable outcome, and has two research questions: when managers make decisions, what leads them to choose a risky alternative? and: what determines whether the decision proves correct? Material developed to answer these questions is used to construct a model of decision making that explains real-world evidence of managers' risk-taking and its results. There is an extensive literature on risk and decision making because the topic has been of interest in many disciplines since at least the 18th century. Thus insights on the research questions are available from studies of animals, humans and organisations; by scholars in biology, psychology, finance and management. Even so, there is a large gap as most studies are conducted away from corporate settings and use subjects with limited decision experience. The few studies set in real-world conditions tend to concentrate on a single aspect of decision makers' attributes, setting and behaviour, and on either decision choices or outcomes. The empirical work in this thesis is designed to fill part of this gap. The specific purpose of this thesis is to integrate decision features to provide a seamless link between decision maker, environment and outcomes in relation to non-diversifiable risks associated with the decisions of individual managers. Conclusions are drawn from representative real-world data obtained from intensive studies in the form of two surveys of experienced managers. A model is developed from the literature which indicates that the main determinants of individuals' risk-taking are personality, decision making style and expectations in regard to the outcome. This theoretical model is then quantified using a case study of a hypothetical business decision which records decision maker attributes and examines why they take a risky alternative or not. A second survey compiles an extensive database on the attributes of executives and their organisations, and uses this material to explain financial results and crisis frequencies in terms of decision maker attributes, industry and organisation characteristics, and organisational environment and risk practices. The materials address the organisation-level topics of the causes and consequences of risk-taking by managers, and point to strategies for organisations to dial up the right level of risk. Conclusions from the research are presented as an extended explanation of the causes and consequences of risk-taking; a new model of decision making called Risk Budget Theory; and a practitioner oriented guide to developing risk-based strategy. This last provides an academic basis to corporate risk management for application by practitioners. This extends the scope of risk management which - in Australia, at least - has largely addressed workplace hazards or provided defences for Boards against potential litigation. Apart from the thesis' contribution to management theory, the holistic description of managers' real-world decision making has applicability to practising managers, and the explanation of corporate results will interest investors