Kerns: The Science of Risk Aversion

February 6, 2018 07:15 AM
 
Human beings are risk adverse for a reason, but an evolutionary response to risk is less relevant when it comes to intellectual or operational risk. 

Human brains and our adaptive behaviors evolved to be risk adverse. This makes absolute sense when it comes to physical survival. Even though we are no longer subject to dinosaurs and environmental danger, the human brain relies on architecture for dinosaurs and danger. When we have something in our environment that creates emotional responses (like loss and all those zeroes we have to write on margin checks or unpredictable markets and production influences) our brains auto-pilot to protect, shut down, flee, fight, or become paralyzed. This is especially true in situations of unpredictability when the more primitive parts of our brains become activated and look to assign, identify and obliterate dangers, threats or fears. 

Fight, flight, fear, and paralysis are all evolutionary adaptive behaviors that are innate to human beings. However, having these programmed responses or feelings do not require us to believe they are true or to act upon and be driven by them. An evolutionary response to risk that required flight, paralysis or aggression when confronted with physical dangers is less relevant when it comes to intellectual or operational risk. 

Consider the evolutionary driven behaviors of our “Plant the Flag” Producer who fails to divest of a position even as it falls apart. In avionic research, studies about pilot decision-making related to accidents go the same route.

Research reveals that pilots consistently fail to shift their behavior despite evidence that indicates they should adjust their behavior to avoid an accident.

Once our brain invests in a decision, we see change as wrong. We are wired, with primitive defense mechanisms like fear and shame, to avoid being wrong at any cost. In order to overcome that wiring, we have to expose the behavior as instinctual and not logical; that it makes sense that we avoid FEELING wrong AND it makes sense to set aside feeling and wiring to make a more objective decision.

This type of thinking takes considerable awareness not often available in unpredictable situations. So when we invest—time, energy, dollars, emotion—and we are confronted with unpredictability, we revert to our primitive brain wiring; we dig in rather than release.

Probably a better approach is to adopt another mantra: Build capacity to say, “yesterday I was right; today I’m wrong.”

Awareness is Key
What works effectively when confronted with risk-based decisions that expose our operations or financial welfare is awareness. To actively acknowledge fear, shame, flight or aggression is normal but not necessary. And then we have a strategy to do something more necessary or relevant when making operational decision, especially those related to marketing and money.

We become MINDFUL, deferring an emotionally triggered danger response in favor of more effective and empowering behaviors, like planning, execution, processes and decision-making. Following this route allows us to integrate data, wisdom, creativity, and capacity to collaborate and take advice.

What we know from research is that brains rarely work effectively when they perceive threat. This actually shuts off the parts of the brain that would access creativity, goal setting, planning and connection. So, if your brain doesn’t have the capacity to work with and decide with your advisory team, you will find no value in discussing or strategizing. You will be limited, inhibited, resistant, protective, and rejecting.

Be sure to read our next column, in which we’ll help you learn how to practice sound risk management behaviors.

Editor’s Note: Karen Kerns is CEO of Kerns & Associates, a risk management firm serving agriculture in Ames, Iowa. The company employs a holistic approach to agricultural risk management, operating as an extension of clients' operations to ultimately enhance their customers’ profitability. For more information, call 515.268.8888, or go to http://www.kerns-associates.com/

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