Cultural Theory of Risk
Back in 1984 an anthropologist, Mary Douglas, wrote about her theory for why people chose to form and continue to associate with groups. She postulated that the way that people thought about RISK was a primary driver.
Cultural Theory describes four views of RISK:
Individualists see the world as mean reverting. Any risk that they take will be offset by later gains.
Egalitarians see the world in a delicate balance where any risky behaviors might throw off that balance and result in major problems.
Authoritarians see the world as dangerous by manageable. Some risk can be taken but must be tightly controlled.
Fatalists see the world as unpredictable. No telling what the result might be from risk taking.
The dynamics of human behavior are influenced by these four groups. People shift between the four groups because they find the environment either validating their belief or failing to validate their belief.
Cultural Theory also see that there are broadly four different risk regimes in the world. The four groups exist because the risk regime that validates their view of risk will exist some of the time.
These four regimes are:
Normal Risk – when the ups and downs of the world fall within the expected ranges.
Low Risk – when everything seems to be working out well for the risk takers and the dips are quickly followed by jumps.
High Risk – when the world is on the edge of disaster and hard choices must be made very carefully.
High Loss – when the risks have all turned to losses and survival does not seem certain.
There are huge implications of these ideas for risk managers. Risk management, as currently practiced, is process that is designed by Authoritarians for the Normal Risk regime. The Global Financial Crisis has shown that current risk management fails when faced with the other regimes.
One solution would be to redesign risk management to be a broader idea that can both use the skills of those other three views of risk, adapting to the other three regimes of risk.
This idea is discussed in more detail here and in a forthcoming series of articles in Wilmott Magazine.
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