A Need for Bipolar Managers?

I just gave my SPE Distinguished Lecturer presentation for the chapter here in Hanover, Germany. As I mentioned in a previous posting, the brunt of the talk is that companies should be risk neutral when considering the economic metrics of individual projects, and should strive to apply their risk tolerance at the portfolio level. This approach creates more value in the long run, but it sometimes means the company proceeds with a project while the uncertainty range of the outcome is still fairly broad. In other words, it requires that at the project level, we live with more risk than we have historically been comfortable with.

Much of the evening’s discussion was around the need to change corporate risk and reward mechanisms if a risk neutral approach is to take hold. After all, if a project manager is going to be punished for taking reasonable risks that then turn out near the lower end of the range of possibilities, he or she is not going to be risk neutral.

One gentleman asked a really intriguing question, which I would paraphrase as follows: We want managers to be risk neutral at the project level, which generally means being willing to accept a higher level of risk than historically we have done. At the same time, we want managers who are absolutely safety conscious, and will adhere strictly to a “safety first” policy. Isn’t this sending mixed messages?

I replied that my presentation refers only to financial risk, not health, safety, or environmental risk. I am most emphatically not encouraging anyone to accept a higher level of risk on those issues.

But the questioner persisted: People tend to be risk takers or risk avoiders. Someone who purchases every extended warranty on his home appliances is unlikely to go bungee jumping. Are there even people out there who are risk neutral when it comes to money, but extremely risk averse when it comes to safety? Isn’t it possible that we are looking for a hybrid personality type that doesn’t exist – or if it does, would the personality type be classified as bipolar?

This is a great question, one to which I do not have a great answer. If we start rewarding project managers who take more financial risk when making decisions, are we increasing the probability of another Macondo disaster because these people are likely to make risk neutral decisions on the health, safety, and environmental front, too? I would like to think not – that the distinction between financial risk and safety risk is fairly straightforward. But I’m honestly not sure.

We are all far more strongly affected by external signals and events – even apparently unrelated events – than we think. Jonah Berger of the Wharton School found that in the wake of Hurricane Katrina, baby names starting with the letter “K” increased in popularity by about 9%. This has happened in the wake of other well-known – i.e., massively damaging – storms, too; the initial becomes trendy (note to self: buy stock in baby clothes monogrammed with the letter, “S”). I doubt that people are consciously naming their children after episodes of death and destruction. They probably would deny that they were influenced at all.

Kathleen Parker’s last column before the US presidential election points out that when home sports teams win, we are more likely to vote for incumbents (which means Barack Obama should have been rooting for Ohio State the weekend prior to election day). Why? Because when we feel content, we don’t vote for change. The fact that our contentedness is coming from the final score of an athletic event that has no bearing whatsoever on the relative abilities of two candidates for office has nothing to do with it. As Simon Sinek points out, the decision making center in our brains is far more closely tied to the emotion processing center than it is to the data processing center. We vote the way we feel, not the way we think.

So will encouraging managers to take more financial risk at the project level cause them to make riskier decisions regarding safety? I’d love to hear other opinions on the subject.