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Risk Averse, or…? | The Discipline of Innovation

Risk Averse, or…?

Here is something I ran across yesterday that confuses me quite a bit. Take a look at this graph from the Economist:

The thing that confuses me is that I often hear from managers and others here in Australia that the reason that their organisation isn’t very innovative is that they are risk averse. But if you look at that graph, Australians clearly aren’t risk averse at all.

How can it be that we embrace risk in gambling, an activity that only destroys value, but we avoid it in innovation, an activity that actively creates value?

Any thoughts?

About Tim Kastelle

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

14 Responses to Risk Averse, or…?

  1. Håkan Askengren 2 October 2011 at 7:13 pm #

    I have lived in Australia and what I find comparing to Sweden is that you Australians have risk aversion in your blood. Some historical heritage of hard times of gold digging / opal mining, prisoners… might be some clues :-) I feel there is some kind of straight forward solution aura around an Australian. This should then mean that if managers in Australia think that “their organisation isn’t very innovative”, it surely must be of other reasons than lack of risk taking.

  2. Tim 2 October 2011 at 7:17 pm #

    Thanks for the thoughts Håkan. I agree with you about the solutions orientation here, and that might be part of it. It’s a hard thing to figure, though, at least for me.

  3. Stephen Downes 2 October 2011 at 10:47 pm #

    I think you’ll find that the nations at the top of the list all have government-sponsored gambling programs.

    In Australia, it’s tatts, trots and pokies. In Canada, we have 6-49, off-track betting, and other institutionalized gambling. And Ireleand of course has the world famous Irish Sweepstakes.

    I don’t think this reflects a greater propensity to take risks. I think it reflects a greater trust in government, even when that government is harming us.

  4. Matt Perez 3 October 2011 at 4:38 am #

    As I understand it, gamblers, as well as gamers, don’t see these activities as risk taking. They are “irrationally” confident that they’ll “do better next time.” In the brain, the “high” of winning is more potent, and remembered longer than the “low” of losing. What takes most of us away from the table is the Prefrontal Cortex projecting the future (loses) but in the pathological case the PFC is overwhelmed by emotional signals from the Basal Ganglia and we gamble on.

    That’s not so different from “serial entrepreneur” behavior. They (we) remember the “highs” really well and give speeches about it. But never mind all the miserable failures, they are just learning experiences and the next one always is “the killer.”

    So, gamblers and serial entrepreneurs stay in the game for similar reasons. But why do they enter one activity versus the other? What tilts the balance one way or the other?

    My guess is that it is mostly a matter of what the overall society, the culture, accepts/promotes as “fun.” As Stephen Downes mentioned, government-sponsored gambling is one way of promoting gambling. But I think it goes beyond that. In fact, these government-sponsored programs would not come to pass if the culture at large didn’t already accept gambling as a “fun” activity. Do your job, be a good boy/girl/whatever and then go do the “fun” thing on the weekend. And don’t talk about your boring job at the dinner party, let’s only talk about those winnings.

    In other places, most notably “Silicon Valley,” entrepreneurship is the celebrated, “fun” thing to do. It greases the skids. It is easier to become an entrepreneur than a gambler. Do your job because you need to eat, but rush home to work on your startup idea. And talk only about the latter at the dinner party.

    Having said all this, your question still remains: if “fun to enter” is the chicken, then how can we get more “entrepreneurial” and less “gambling” eggs?

    Well, I am happy to tell you that I am working on a “killer” answer to that very question right now and I’ll tell you all about it at our next dinner party :)

  5. Tim 3 October 2011 at 8:41 am #

    That’s an interesting thought Stephen – thanks. I can see your point, but there is also government-sponsored gambling in the US & UK in the form of lotteries, and they’re at the bottom of the list. I’d be very curious to see stats on trust in government though – the electorate down here is quite disillusioned and cynical (though it’s not as bad as the US), but the trust angle could be correct.

  6. Tim 3 October 2011 at 8:42 am #

    Hi Matt – I think you might be on to something. I’m very interested in hearing about your killer answer. I’m currently working on getting my next trip to your neck of the woods set up – I’ll let you know as the details start to solidify.

  7. Marco 3 October 2011 at 5:00 pm #

    Lies, lies and damn statistics etc.
    Notwithstanding, the questions are: is gambling a good proxy for risk taking which is a good proxy for innovation? Even if that’s the case, a second order proxy must be on very shaky grounds.
    Are gambling statistics (or risk taking statistics) precise enough to give a profile for a whole country? Given that gamblers and risk takers are a minority of the population, averaging out their losses over the whole population is somewhat meaningless… Unless the percentage of these people is constant across all nation. But that’s exactly what is in question. It is not how much risk taking a population is, but how many people are. (the former will only affect the “return on investment”. What we are interested in is the latter, the variety of risk)
    There is also ambiguity on how the factors are related: is it “Australia is so risk taking that they have high levels of gambling loss”? or “Australia has so much gambling that it must be risk taking (or not)”?
    At any rate, we need a plausible story to use proxies. I can imagine someone saying “Australian are so risk averse in business that they use gambling as a way to relieve their risk taking tendencies” or similar. This and others are all equally good just-so stories with no backing (that make use of overoptimistic generalizations about a mythical “typical” Australian)

  8. Tim 4 October 2011 at 7:32 am #

    Fair points Marco. I’m not sure about the proxy argument though. Both gambling and innovation are directly undertaking risk-taking behaviour. They may stem from different personality traits (though research suggests this is not the case), and the activities are almost certainly undertaken by different sets of people, which is important.

    I agree that averaging out the stats per capita doesn’t add an information, so take a look at it this way:

    Gambling Investment (which has a negative return)
    Australia – $21 billion
    United States – $100 billion

    R&D Investment (which has a positive return) (which is a proxy, and a lousy one for innovation)
    Australia – $14 billion
    United States – $369 billion

    I still see a paradox here.

  9. Neil 5 October 2011 at 1:50 am #

    Tim it’s a weighting thing. Each individual gamble typically involves a risk of a SMALL loss (even if cumulatively they can make big losses – the myopia of the compulsive gambler) Innovation typically involves risk of a BIG loss. The utility of risky behaviour is a function of the individual, the culture – and the size of loss and gain involved.

    It’s also why the same individual may gamble and have insurance. Just stop someone going into a betting shop or a race track and ask them if they have any life or property insurance. I’ll gamble that they have – but just in case they react to your cheek make sure you have insurance first.

  10. Tim 5 October 2011 at 3:12 pm #

    Hi Neil – thanks for that. You’re probably right – that’s a pretty sensible explanation. I still find the numbers staggering…

  11. Neil 5 October 2011 at 6:02 pm #

    Tim that’s great but your original question is still a good and interesting question because even if my suggestion is a basis for a workable answer it still raises other questions. For example, suppose the same executive gets fun out of a bet on a horse that has the risk of a small loss, but misery out of another kind of bet involving an (uninsured) risk of highly costly loss of life, house, or waste of R&D resources? Then why does the same person not do with R&D what most people do with risks to life and property and that is insure against the risk of loss? The answer probably lies in the uninsurability of R&D risks due to information and incentive issues, these are heterogeneous events where risk is difficult or impossible to measure and there would also be the moral hazard problem to contend with.

  12. Tim 5 October 2011 at 9:23 pm #

    Neil, I always wonder if this reflects irrational calculation, or just innumeracy. I just ran across this fantastic headline:

    “Bletchley Park Gets a £4.6m grant, financed by pro-innumeracy programme”

    http://boingboing.net/2011/10/05/bletchley-park-gets-a-4-6m-heritage-lottery-fund-grant.html

    Including this section:

    “Ironically, the money to restore Bletchley has come from the lottery, a government-run system designed to reinforce and exploit statistical innumeracy of the sort that Bletchley’s cryptographers overcame in order to help win the war.”

  13. Neil 9 October 2011 at 10:23 pm #

    Tim, that is a great quote, Alan Turing will be turning in his grave – but in the spirit of this thread we should say probably turning

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