With losses, the opposite is true. If there is even a small chance they may lose what they have earned, people will go to great lengths to protect against the loss. They will buy insurance for exorbitant amounts.
Companies will make bad long-term choices in favor of shorter term ones to protect against missing their quarterly earnings and taking a loss on the value of their stock. They will be loss averse. The interesting thing is that many of the best companies start by being risk-seeking. They dream of amazing things — they take risks on markets, people and products.
They take risks that most existing companies would not deem feasible and when those risks pay off, they pay off in significant gains. And yet, as those companies become more successful they become fundamentally risk averse. That risk or loss aversion manifests in so many ways: they under-invest in new products; they are unwilling to hire people with less experience; they spend money on risk-mitigation systems; they build in all kinds of cushions into their forecasts and they take their marketing in a conservative direction.
Why do the most risk seeking of individuals, entrepreneurs, become loss averse? For a variety of reasons:. We identify certain roles where we are willing to promote people without the experience for the role. We try to ensure that the short-term choices we make are leading us to the long-term destination we are trying to reach.
Our Risk-Averse Army: How We Got Here and How to Overcome It
It gets harder and harder to make these choices as we grow and scale. And yet it becomes ever more important. Loss aversion seems to compound as one grows. Each individual becomes loss averse. Each function hedges on the other functions, feeling like they cannot take risks without the cooperation of other functions.
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And then the CEO and founders inherit all of that loss aversion and add a new layer of conservatism for presentation to the Board and shareholders. Loss-aversion is among the most corrosive behaviors at a startup that is aiming for significant impact and growth.
Lets make sure we all make a couple of well-timed irrational ones. You are commenting using your WordPress.
Risk aversion is just making us all feel ordinary | Paul4innovating's Innovation Views
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Passion for mediocrity
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