Tim Koller, Dan Lovallo, and Zane Williams

Many of the managerial tactics used by companies in their capital-allocation and evaluation processes fail to take note of basic [behavioral biases]. By considering the success or failure of projects in isolation, for example, they fail to understand how each will add risk to the company’s overall portfolio and institutionalize a tendency toward risk aversion, essentially recreating the narrow framing that occurs at the individual level. To make matters worse, many companies also hold individuals responsible for the outcomes of single projects that have substantial uncertainty and fail to distinguish between “controllable” and “uncontrollable” events, leaving people accountable for outcomes they cannot influence. As a result, many companies wind up with risk aversion at the corporate level that resembles that at the individual level—squandering the risk-bearing advantages of size and risk pooling that should be one of their greatest strategic advantages. In fact, many companies seem to exacerbate loss aversion, which is the primary driver of risk aversion.

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