A venture into risk

Hello everyone!

What is risky?

The risk perception varies from founder to founder, culture to culture, country to country, parent to parent: and it even depends on age and gender.

And still, as human beings we are somewhat obsessed with risk. So is our brain. Not sure what comes first.

This is the first part of my venture into discovering the term “risk” through the lens of culture, bias, evolution and neuroscience.

Risk

Risk, in general, can be defined as the potential for loss or harm, or the uncertainty surrounding the outcome of an event or decision. It is often measured by the probability and magnitude of potential negative consequences.

Business side of things

In business, risk refers to the uncertainty associated with the success of a product, service, or investment. This includes market risk (acceptance by consumers), financial risk (funding and cash flow), technological risk (feasibility and scalability), and execution risk (team's ability to deliver), hiring risk, competition, being too slow.

The bigger the capital at risk, the slower the decision-making process. The smaller the venture, the faster the decision-making process, despite the fact, that business death is much closer after each decision a SME makes.

During my years building up the professional services teams at Freshworks and working through large-scale projects, the question always was: where are the biggest risks (people, product, process) and what can we do now to mitigate any risk in the future? Over time, we got significantly better as individuals as well as a team to avoid risks for a better outcome and much faster execution.

And I remember people saying: “Don’t be so German, don’t waste your time with risk assessment, just do it and figure it out on the run!” just to come back later and thank us for the seamless project execution.

I find a deeper look at risks, taking them apart, a somewhat relaxing exercise. It highlights their potential impact - which generally is smaller than anticipated.

It allows going forward and avoid paralyses.

Cultural dimensions

The other day, somebody told me the following:

“It isn’t surprising that Australia does not come close to the success of the United States in early venture development.

Who went to the US? People who dared to be different. The journey to get over the ocean was full of risks, especially long if you were off to the West Coast. That is the core of why the United States is so successful in starting up. To survive, you needed to be risk-seeking, build your own life up again, embrace to complete unknown and still do it.

Who came to Australia? Convicts - they did not want to come in the first place, and nobody wanted you, where you came from. Your goal way out of prison was to obey, be one of many and not stick your head out too far - you’d be risking your life otherwise. That mindset carries on in the culture. You stick together, but you don’t stick out.”

It is true that in cultural settings, risk perception and tolerance can vary significantly. Some cultures are more risk-averse, prioritizing stability and certainty, while others are more risk-tolerant, valuing innovation and entrepreneurship.

Hofstede's cultural dimensions theory, particularly the Uncertainty Avoidance Index (UAI), helps compare risk attitudes across cultures (Hofstede, 2011).

Hofstede has done the most significant large scale, global study on cultural differences.

Let me give you some example, the higher the score, the lower the risk tolerance. The definition of the Uncertainty Avoidance Index developed by Hofstede looks like this:

(For more go here.)

Looking at the 5 point difference between the US (46) and Australia (51), I am not really sure this specific data set supports the theory of US risk-takers vs. Australian convicts.

So, what else might it be?

Down to the individual

From a neurological perspective, risk and risk attitude are linked to the brain's reward and decision-making systems. We talked about this on some occasions, either during the deep dive into anticipation and its underlying processes or the dopamine 101.

To refresh, every decision is looked at for two perspectives:

1. How much can I gain?

2. How much can I lose?

It appears that there are both sides of the same “risk” coin, go through two distinctive neurological pathways.

The loop follows an almost identical bottom-up and top-down trajectory as anticipatory processes.

That would mean that there is a set of risks concerning our, e.g. survival, that is similar in all human beings.

The further we move away from pure survival, the more individualistic does the risk profile become.

It is as if we are moving away from the bottom of the Maslow pyramid, to the very top, where the risk understanding differs most from individual to individual, going along the trajectory of culture, peer group, and individual.

Evolution with risk

Sorry to burst your bubble, but we are not the only species on earth engaging in risk-taking behaviours. There are many, from Orang-Utans to the pumpkinseed sunfish, guppies (more fish), puppies and birds, to name a few.

There seems to be some common themes:

1. Risk-taking males attract more female counterparts [study]

2. Risk-tolerance is higher in adolescents (which, especially in humans, might be because some parts of the brain connected to risk assessment, like the prefrontal cortex, are only fully developed by age of 25) [study]

3. Risk-taking individuals are more likely to venture into new geographies or inspect predators from a closer distance. [study]

4. Females appear to be more often risk-averse than males. (on average; does not mean it can’t be the other way around, gentlemen!) [study]

(please keep in mind these are studies, they are strongly directional, life might differ)

Abstracting the findings above, riskier behaviour allowed animals to:

• eat new things and hence find food with more calorie density

• discover new places to live, and find better shelter

• inspect danger closer and hence understand much better what to avoid and what not (and sometimes get killed in the process, then others learnt better not to get to close)

• probably, and this is a guess, female spending more time with offsprings in safe environment while male were hunting developed certain pathways to evolutionary optimize for survival.

So what is the learning so far?

Risk is all around us. Luckily, for the most basic steps in live, our brain can assess risk autonomously.

That our brain constantly assesses risk, and seemingly it did pretty well, should be a sign of how important conscious risk evaluation is.

Funnily, if we want it or not, human beings are all equal about survival related risks. The risk tolerance here is fairly low for everyone.

We don’t like nasty snakes, fires or tigers in the wild.

But the more risk is associated with goals of self realization of a group or even more so as an individual, the more risk profiles start to drift apart.

This is measurable.

Look at Hofstede.

Risk (in)tolerance is not set for life. While there might be a personal baseline, this can shift over the years. Your risk profile might look more like the learnt risk assessment of your parents, and over time differ pretty significantly.

What looked risky once, can become every day activity.

I think it is pretty important to understand your own risk profile. It can highlight what holds you back. It can highlight where you might be biased (positively or negatively) and why.

And help you overall to make better decisions. I am not saying less risky - I am saying better. How “better” looks like for you, that is your task to figure out. ;-)

Risk happily.

Alex