General Risk Propensity in Multifaceted Business Decisions: Scale Development

Abstract

In decision-making studies, risk is often viewed as a function of the uncertainty of the outcomes and the likelihood and perceived value of each possible outcome (e.g., Fishburn and Kochenberger, 1979; March and Shapira, 1987; Sebora and Cornwall, 1995; Stewart and Roth, 2001; von Neumann and Morgenstern, 1944). This implies that decision-making under risk should be situational dependent. Also, the making of risky decisions is typically based not exclusively on rational evaluations of the outcomes and their likelihoods, but also is affected by individual predisposition toward risk (i.e., risk propensity) (Bromiley, 1991). Various theories abound about the nature of risk propensity. One theory suggests that risk propensity is a general personality trait, which forms the basis of individual risk-seeking or risk-averse behavior that is consistent in different situations (Ghosh and Ray, 1997; Keinan et al., 1984) and is a stable and constant dispositional attribute (e.g., Fischhoff et al., 1981; Rowe, 1977; Wolman, 1989). Others theorize that risk propensity of individuals varies in different decision-making situations (Keil et al., 2000; MacCrimmon and Wehrung, 1990; Weber et al., 2002). That is, the effect of risk propensity on decision-making depends on the context of a situation, such as investment or gambling. Finally, some define risk propensity as an individual's current tendency to take or avoid risk (Pablo, 1997; Sitkin and Pablo, 1992; Sitkin and Weingart, 1995). From this perspective, risk propensity is a personality attribute that reflects a decision-maker's cumulative tendency to take or avoid risks and is simultaneously persistent and can evolve over time as the decision-maker gains more experiences. Regardless of the differences in its theoretical perspectives, risk propensity remains a useful indicator of how individuals make decisions under risk conditions. Risk propensity is important to business management because business decisions are typically made under risk conditions in which outcomes of the decisions are more probabilistic, rather than deterministic in nature. Therefore, decision-making agents' risk propensity to a significant degree exerts its influence on the agents' decision-making and potentially determines the eventual outcomes (Keil et al., 2000; Martinez and Artz, 2006; Sitkin and Weingart, 1995). The effect of risk propensity in business decision-making has been examined by various business management literatures such as finance, operations, marketing and human resource management (e.g., Bromiley, 1991; Jaworski and Kohli, 1993; Kahneman and Lovallo, 1993; Kapteyn and Teppa, 2002; Mukherji and Wright, 2002). For example, in the fields of operations management, such as inventory management in supply chains, the successful implementation of inventory policies depends on accurate understanding of human behavior. When characteristics of decision-makers, such as risk propensity, are not considered, such policies may (1) fail to capture important system dynamics or (2) yield policies that are difficult for decision-makers to follow in practice (Bendoly et al., 2006). At the top management level, risk propensity of top executives can also influence how firms gather and respond to changing market conditions (Jaworski and Kohli, 1993). Furthermore, business decisions are inherently multifaceted in nature, potentially involving some combinations of risks in marketing, financial, operational, and/or even social aspects with a high level of ambiguity. For example, regarding decision-making in new product development process in high-tech industries, managers need to evaluate market conditions, the financial risk of new product introduction, operational implications of the new technological requirements, and potentially social responsibility issues associated with the use of new and unfamiliar technologies. Therefore, the decisions are typically made after the issues in these various aspects are collectively taken into account, and risk propensity is a key factor in such a decision-making process. …