In the post on managing people, we covered three factors that affect peoples' behaviour. Then, in the post just before this one, we introduced the idea of risk aversion as a useful way of explaining behaviour. In this post we will layer up the original model for predicting co-operation, with the concept of risk aversion, and see what the implications are for designing roles in an organisation.
Let's start by revisiting the broad factors that we proposed in the post on managing people, and giving them a "risk" flavour:
- Personality, bias and heuristics: Some people are by nature comfortable with ambiguity. Some are novelty-seeking. And some are highly motivated by rewards. When someone exhibits a combination of these traits, they are probably willing to take on more risk in exchange for rewards. By contrast, someone who takes comfort in routine, who prizes stability over stimulation, and who fears failure and censure, is likely to be more risk averse.
- Incentives: Just as incentives can be crafted to make people work hard, incentives can also be designed to shape how people perceive, assess and respond to risks. Do you offer bonuses for exceeding targets (thus increasing the payoffs for taking risks, cutting corners, or getting creative)? Do you impose penalties for deviating from procedures and guidelines (thus discouraging experimentation)?
- Culture: Culture exerts an important influence in parallel with explicit incentives. The system of values, the shared narrative and the tribal codes that are embedded in an organisation normalise some behaviours while painting others as unacceptable or deviant. An organisation that embraces slogans like "move fast and break things" will encourage risk-taking. One that puts up signs counting the number of accident-free days discourages it.
Red and Blue revisited
In a previous post I proposed dividing the world into very risk averse "Reds" and less risk averse "Blues". I proposed that you can create or characterise professional roles in a similar way. Let's illustrate with two more contrasting examples:
Xavier is a safety technician at a laboratory where dangerous chemicals are processed.
- His job is to retrieve chemicals when they are required for an experiment, return any excess to storage afterwards, and dispose of any by-products. Even trace amounts can cause severe harm, so there are detailed protocols for transferring, storing and using them.
- Xavier's role requires strict adherence to all of these, and to national and international safety standards. He must attend regular trainings and seminars, must take part in disaster preparedness exercises, and must maintain excellent records.
- He was selected for the role based on his academic qualifications (BA Chemistry), his experience (eight years in army logistics), and his psychometric test results that suggested a calm demeanour, attention to detail, and a preference for career stability over financial rewards.
- The compensation includes no performance bonuses, but increases with seniority, and there are various "long service awards". On the other hand, if he neglects to follow protocols he will promptly fired, and if his deviation from policy results in a spill or accident, he will likely be sued by the lab.
Here's a stylized picture of his risk/reward function. Note that for every incremental increase in the amount of risk he takes, the rewards are less and less attractive. Indeed, beyond a very minimal amount of risk, the rewards diminish and are outweighed by the severe negative payoffs. (The shaded area is meant to convey a range of potential outcomes, ranging from bad to very bad.)
Meanwhile, Yolanda sells decorative plants to businesses. Her job is to cold call prospective clients, convince them to let her visit and pitch to them, and then sell them a subscription service in which her company will deliver and periodically replace ornamental ferns, cactii and so on in their lobbies and corridors.
- She is given a catalogue, some data on previous sales and a map of the major business districts. There is no other guidance.
- She was selected for the role because she showed up at the company's office with her resume, talked her way into the building, and convinced the hiring manager to interview her.
- Her base pay is low, but she can earn large commissions on sales she makes. In addition to this, the company offers a $10,000 prize every month to the salesperson who signs up the most new clients, and announces that it will pay any parking tickets that the salesperson gets while travelling to meet clients.
Let's take a look at her risk/reward function. Note that taking on additional risk yields disproportionately high rewards. (Again, the shaded area is meant to convey the range of possible outcomes, which in this case range from mildly negative to very good.)
Are you in a Red job or a Blue job?
Let's apply this thinking to the job you are doing now. How much risk are you expected to take on a day to day basis? When you are engaged in legal research, are you being asked to look for novel arguments, or settled law? When you are drafting a document, would it a few typos be excused if you managed to weave in a novel and valuable way of constructing a clause? When working on a deal or a case, are you rewarded for execution or inspiration?
And what about you? Are you a Red or a Blue?