Affect Of Attitudes To Risk On Decision Outcomes - Essay Example

AFFECT OF ATTITUDES TO RISK ON DECISION OUTCOMES. Risk can be defined as the likely hood that a project or investment may fail to yield the predicted outcomes in the future period. These are the deviation occur because of the future events like the changes in government regulations, natural calamities and demographic changes that one cannot predict. Probability is attached to the outcomes predicted by the decision makers. Having defined risk, attitudes to risk can be explained as a situation where one takes a position towards the risks that might occur and how it affects his or her decision-making abilities (Hammond, Keeney & Raiffa, 2006). Therefore, the decision makers who include people like managers and directors of companies have different attitudes towards risk that may prevail in the market in the future. Their attitudes may be based on economic conditions like an uncertain market conditions where it is totally unpredictable, a market condition where there seems to be a downturn in the economy or a market condition where everything falls into place as predicted as the market is experiencing an upswing. These three market conditions affect the attitudes to risk on decision making. With that in mind, individuals and organization have an impact on attitude to risk on the decision outcomes. With reference to the Mt. Everest disaster which occurred in 1996, the affects of attitudes to risk on decision outcomes will be greatly explained. In the disaster, the climbers did not take the standard and required safety feature before the expedition. The climbers had been enticed by their need to achieve certain goals individually and as a group, without considering the risks of such an expedition (Nepal & Mu2015). With reference to this disaster we will look at the affects of attitudes to risks on decision outcomes. To begin with, we will look at the individuals’ affects of risk attitudes on decision making. Individuals tend to take bigger risks if they have a big amount of wealth in their portfolio. Normally, where there is a high risk in an investment, it is probable that the payoff tends to be bigger, and where the risk is small, the payoffs tend to be smaller (Chaney & Martin, J. (2013). Due to this reasons, individuals with massive wealth in their portfolio tend to be riskier so as to maximize their payoff. This type of individuals mostly is driven by their ambition to acquire more wealth in the future. Thus, they take a bigger risk in their investments because even if they lose out because of an unsuspected market condition, their wealth always cautions them and thus they have little to fear. Another individual factor that impacts the attitude on risk on the decision outcomes is the knowledge from the market that mostly is bought from the consulting and experts firms in the market. These firms gather, analyze and predict the future market condition and thus they can advise managers on the riskiness when undertaking certain projects and investments. Knowledge from the experts helps individuals to make informed and proper decisions that have a positive impact on the expected outcomes. Although the perfect information is costly, it saves a great deal as opposed to having no information at all. When one has the knowledge, he or she has power, and it is only right that he uses it for the betterment of his decisions and judgment (Collins & Hansen, 2011). Another individual factor that affects the risk attitudes on decision outcomes is the earlier periods' outcomes. Individuals who have had success on their past decisions are likely to be more of risk takers as they deem to have understood the market better. Although this may be misguiding to the individual, it may be a good basis to make decisions as he or she has past experiences and, therefore, will make better decisions. But this might not be the case as the past conditions might not reflect the present and future conditions in the market one operates in. If an individual did not perform well in the past, his or her risk attitudes tend to be averse as he or she is cautious about making certain decisions that tend to have a certain degree of risk in them. There past decision outcomes tend to have an impact on the general attitudes towards risk. These individual factors above are the most common influence of the attitudes to risk on the decision outcomes of individuals. Other factors that may affect the attitudes to risk on decision outcomes are the organizational factors. Like individuals, organizations also influence the general attitudes to risk on the decision outcomes as discussed below. The setting of the organization on a particular industry tends to affect the attitudes to risk on decision outcomes. An organization in industries like the computer and software industries tends to take more risks compared to other organizations in other industries (McKenzie & Woodruff, 2013). Because of the growing and advancing technology, organizations in such industries tends to be riskier when coming up with new products as they are entering a market that is new and mostly not exploited much. The decisions are risky as most of the products are new to the market as there are no definite grounds that the new products will be accepted in but the organization takes the risks. Unlike organizations in the computer and software industries, organizations in the financial industries tend to be more risk-averse thus their moves and decisions are thoroughly calculated before they are acted on. Therefore their attitudes to risk are poor, thus make decisions that might not reap better payoffs as compared to when they take the bigger risk to get higher payoffs. Another organizational factor that affects the attitudes to risk on decision outcomes is the prevailing economic phase in the market. The cycle in the economy is characterized by expansion, peak, contraction and finally depression. For organizations in depression, the attitudes towards risk are unfavorable thus tend to be less risky therefore having decision outcomes that are more cautions. Decisions that are made in this phase do not bare much yield as the organization does not want to lose its resources by investing in large projects. They either invest in less risky projects that probably have a low payoff or they do not invest at all in the prevailing market condition. Their investment decisions are carried forward to a future period where the market conditions are deemed to be favorable. The attitudes to risk on decision outcomes are favorable in the expansion and peak phase in the economy. During these periods, organizations tend to be more open to investment opportunities in the market even if the risks are involved. These decisions are driven by the fact that the organization is predicting growth in its business revenues because of the favorable market conditions, and a certain degree of risk will not hurt. Organizations are willing to take risky investments as the payoff is predicted to be high because the market is experiencing an upswing. Unlike the phase where the economy is in a downturn, organizations’ attitudes towards risks are not poor as the increased payoffs can caution the business if it experiences losses on part of its operations because accepting some degree of risks. Therefore, the different phases of the economy greatly affect the attitudes to risk on the decisions outcomes that the organization is likely to put in place (Maart‐Noelck & Musshoff, 2014). Another factor that may likely affect attitudes to risk on decision outcomes is the goals and objectives that an organization predetermined to have at the end of a particular period. For example, organizations always set budgets for certain periods. These are the quantified plans, in monetary terms, which include the revenues and the expenditures that the organization has set to attain for a particular future period. If in the course of the business an organization has attained its targets and most of what was planned is falling into place, the organization tend to be reluctant on their attitude to risk on their decision outcomes. This is because the organizational goals and objectives have been attained and, therefore, there is no point in involving itself in risky investments and projects as it has already attained its predetermined targets (Liu & Polak, 2015). This is not the case when an organization has not attained is goals and objectives in the course of the period. If, for example, an organization is performing poorly on its budget, the attitudes to risk on decision outcomes tend to be inclined. This means that the organization is willing to invest in projects and activities that are risky with a goal of attaining the preset goals and objectives of the organization. For instance, an organization may invest in a project with high risk but a much better payoff so as to attain the goals that it had set. The above organizational factors tend to affect decisions outcomes when the attitudes to risk are factored in. In summary, the affects of attitudes to risks on the decision outcomes tend be influences by many factors in the market. This is because individuals and organizations have a different attitude to risk when faced with different market states and conditions, either in the present or the future. Some assume that for one to get a high payoff a certain degree of risk is bound to be inculcated in the decisions made and when the risks are low, mostly the returns are low as well. Therefore, the attitudes to risks determine the decision outcomes. As discussed above, individuals and organizational factors affect the attitudes to risk on decision outcomes. Individual factors like the amount of wealth on one’s portfolio, the amount of knowledge from consultants and experts and earlier periods’ outcome have a considerable affect of attitudes to risk on decision outcomes. Most individuals will be influenced by either the listed factors or a combination of various factors that are listed above among other factors. Organizational factors also have affected attitudes of risk on decision outcomes. These among other factors include the general setting of the organization in a particular industry, the current economic phase of the business cycle and the attainment of the organizational goals and objectives in the period, which may include budgets. The discussed organizational and individual factors are probably the most influencers that have to some degree, an affect of the attitudes to risk on the decision outcomes. When responding to risks when investing, their level and the corresponding expected payoff should be analyzed carefully. This will ensure that the business will attain the best possible payoff and the management should come up with strategies to respond to risks that may include; accepting, rejecting, reducing, transferring or sharing the risks. References Chaney, L., & Martin, J. (2013). Intercultural business communication. Pearson Higher Ed. McKenzie, D., & Woodruff, C. (2013). What are we learning from business training and entrepreneurship evaluations around the developing world?. The World Bank Research Observer, lkt007. Hammond, J. S., Keeney, R. L., & Raiffa, H. (2006). The hidden traps in decision making. harvard business review, 84(1), 118. Collins, J., & Hansen, M. T. (2011). Great by Choice: Uncertainty, Chaos and Luck-Why some thrive despite them all. Random House. Walsh, G., Bartikowski, B., & Beatty, S. E. (2014). 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