A Beginner’s Guide to the Psychology of Risk

A beginner’s guide to the psychology of risk

What is risk? How does your brain handle risk? How does your risk disposition affect your decision making?

These are all BIG questions. Because the psychology of risk is a pretty huge topic!

But that’s what we’re here to help with. We’ve worked with the psychology of risk for more years than we care to remember, so we’re distilling everything we know about risk, psychology and decision making into what will hopefully be a concise summary of the psychology of risk and how you can get started with understanding and utilising it.

So let’s give it a go!

What is the psychology of risk?

Very simply, the psychology of risk is the study and understanding of how our mental processes (our psychology) handles responses to ‘risky’ situations or decisions we’re faced with.

Easy, right?

But the more challenging thing is to define what ‘risk’ really means from a psychological perspective.

Often when we hear the word risk we conjure up images of roulette wheels and blackjack tables and lottery tickets – which are a form of risk, of course. But that’s not the only form of risk we face in our everyday lives.

The American Psychological Association dictionary defines risk as:

“1. The probability or likelihood that a negative event will occur, such as the risk that a disease or disorder will develop.

  1. The probability of experiencing loss or harm that is associated with an action or behaviour.”

Basically, a risk is when something negative might happen as a result of an action or behaviour.

Which means that our casino-based understanding of risk is far too narrow. Instead, we need to think of risk as something that happens in a huge range of situations.

Whether it’s crossing the road (where there’s a clear physical risk) or not speaking up in a meeting (where there’s a less immediate reputational risk) or buying something from a social media ad (where there’s a financial risk) – we face risk every day in hundreds of different contexts.

The psychology of risk therefore is a much more extensive topic than you might initially think. It’s about decision making, risk perception and risk tolerance – and how our unique personalities and our shared personality traits combine to give us our own personal risk disposition.

Breaking down the psychology of risk lingo

When we’re measuring and discussing the psychology of risk, here at KinchLyons we use the language of the Risk Type Compass. So before we get any further into why risk matters and how we can support teams and businesses to manage risk psychology in the workplace, it’s worth introducing the Risk Type Compass and its psychometric measures.

Emotion and Cognition

The Risk Type Compass is designed to assess candidates on two fundamental axes of human nature: emotion and cognition. We all fall somewhere on both of these dimensions, and the Risk Type Compass positions these axes as two bi-polar scales, interacting at their centre point. Every one of us falls somewhere on the emotion scale and somewhere on the cognition scale, and the thought is that it’s the intersection of those two positions that ultimately determines our approach to risk.

In the Risk Type Compass, the two scales are as follows:

 

  • Emotion: ranging from Intense in the top left to Composed in the bottom right
  • Cognition: ranging from Carefree in the bottom left to Prudent in the top right

 

If, for example, you score in the mid-range on both scales, meaning you’re neither intense nor composed and neither carefree nor prudent, your result would land you right in the middle of those two intersecting bi-polar scales.

The Risk Type taxonomy

With those two bi-polar scales underpinning the Risk Type Compass assessment, it’s then possible to construct a 360-degree spectrum of risk – the Compass part of the name.

With the two main scales plus two more bi-polar sub scales, Wary-Adventurous and Excitable-Deliberate, the Compass begins to take form – and between those scales, the Risk Types reveal themselves.

 

Wary Risk Type

Scale position: extreme-mid towards Intense on the emotion scale; extreme-mid towards Prudent on the cognition scale

Characteristics: sensitive to risks around them, keen to eliminate uncertainty at ever opportunity, eager to establish control over potential risks.

Intense Risk Type

Scale position: extreme-mid towards Intense on the emotion scale; middling on the cognition scale

Characteristics: highly alert to risk, apprehensive about taking risks, feel very strongly disappointed if things go wrong.

Prudent Risk Type

Scale position: middling on the emotion scale; extreme-mid towards Prudent on the cognition scale

Characteristics: concerned with eliminating risk through clarity, strategic and methodical in their approach to eliminating ambiguity

Excitable Risk Type

Scale position: extreme-mid towards Intense on the emotion scale; extreme-mid towards Carefree on the cognition scale

Characteristics: enthusiastic about exciting things, but with a sensitive risk antennae, committed once a decision has been made

Axial Risk Type

Scale position: middling on the emotion scale; middling on the cognition scale

Characteristics: balanced, proportionate responses to risk, often acts as a mediator in group situations

Deliberate Risk Type

Scale position: extreme-mid towards Composed on the emotion scale; extreme-mid towards Prudent on the cognition scale

Characteristics: calm, calculated and not easily shaken, tend to do things by the book, planned and well-prepared

Carefree Risk Type

Scale position: middling on the emotion scale; extreme-mid towards Carefree on the cognition scale

Characteristics: prioritise opportunity over risk, make on-the-fly decisions easily, good at handling change or urgency

Composed Risk Type

Scale position: extreme-mid towards Composed on the emotion scale; middling on the cognition scale

Characteristics: rarely feel anxiety, dispassionate in decision making, deal well with stress and change

Adventurous Risk Type

Scale position: extreme-mid towards Composed on the emotion scale; extreme-mid towards Carefree on the cognition scale

Characteristics: fearless, confident, unafraid of risk, frustrated by resistance and keen to take action

Type or Trait?

If you’ve read as many psychology papers as we have, you’ll be well-versed in the type versus trait debate. But if not, you’re about to be.

The general gist is that there are two schools of thought when it comes to personality:

  1. Those who subscribe to type theories believe that there are measures that can place an individual into a particular pre-defined category. You either are that type, or you aren’t.
  2. Those who subscribe to trait theories disagree and believe that we all fall somewhere along a spectrum and every one of us is somewhere along a continuum.

The Risk Type Compass, despite using the word ‘Type’ in its name, largely subscribes to the second theory: that we all fall on some sort of spectrum when it comes to personality. The creators of the Risk Type Compass, Psychological Consultancy Ltd, use trait methodologies in their work (which includes being closely involved in the development of the Hogan Assessment Systems suite of personality tests), so it’s unsurprising that the Risk Type Compass has been largely developed with trait theory in mind.

So why the name, Risk Type Compass?

Simply put, it’s because the 360-degree continuum that the Risk Type Compass measures risk tolerance and risk attitudes on is split into eight Risk Types for ease of interpretation and communication.

Risk Attitudes

Aside from placing you into a Risk Type category, the Risk Type Compass also assesses how your Risk Tolerance differs in various areas of your life.

Risk Tolerance is how likely we are to take a risk and the Risk Type Compass assesses that likelihood across five Risk Attitudes:

  • Financial: confidence in making financial decisions and investment choices
  • Reputational: tolerance about behaviours that may offend others’ sense of propriety
  • Social: comfort when opening conversations, being in the limelight and addressing groups
  • Recreational: readiness to pursue challenging and potentially dangerous activities
  • Health & Safety: attention to matters that may impact on health or wellbeing

Although your Risk Type may suggest that you’re generally averse to taking risks, it might be that your aversion is focused on, for example, financial risks – but that you’re much more comfortable taking recreational and social risks.

It’s important to remember that a Risk Type is merely a categorisation of your risk psychology – it’s a ‘type’ for communication and interpretation purposes, but the traits that determine your Risk Type are a continuous 360-degree spectrum, which is reflected in the variety of Risk Attitudes within a single Risk Type.

Why does the psychology of risk matter in the workplace?

Now that we’re clear that the psychology of risk impacts every area of our lives, it’s no surprise that it plays a big role in our workplaces too.

In the workplace, there are two things to consider when we’re thinking about the psychology of risk. First, how does our Risk Type affect our individual interactions within the workplace? And secondly, how does the combination of Risk Types across teams, departments and entire organisations affect the organisational risk landscape?

Risk Type and individuals in the workplace

As we’ve seen, Risk Type and decision making are intricately linked – and in the workplace we face hundreds of decisions every single day. From how much we push the edges of our 60-minute lunch breaks to whether we ask for that pay increase or not, the range of decisions we face is huge.

And Risk Type has an increasingly important application in workplaces where health and safety are a concern. In industrial workplaces or where hazardous materials are handled, the Risk Type Compass has been used to identify individuals who may be less likely to conform to rigid rules and procedures. That doesn’t mean that those individuals aren’t suitable for that role, but it does allow management and leadership to create procedures and environments that account for those individuals.

Assessing Risk Type on an individual level isn’t about identifying suitable people for roles; it’s about adding another layer of insight into individual personalities that can help an organisation harness their potential and mitigate any negative consequences that might be associated with a particular Risk Type.

Risk Type & Occupation

While Risk Type doesn’t have a direct application in indivdual selection processes, there is some interesting evidence that suggests that particular Risk Types are drawn to particular professions.

The human population as a whole is evenly distributed around the Risk Type Compass – which makes it surprising to see some industries and job roles have a notable skew in a specific direction.

One example of such a skew is in Administration Professionals, where 25% of surveyed individuals (n=240) were Wary Risk Type, while only 3.75% were Composed, suggesting that administrative professionals tended to skew significantly towards the Measured end of the cognition spectrum and towards the Emotional end of the emotion spectrum. The Wary Risk Type is characterised by self-discipline, hyper-awareness of risk and a high level of organisation – which aligns well with the demands of an administrative position.

 

 

In almost-direct contrast, recruiters were found to skew heavily towards the Carefree Risk Type. In a survey of 805 recruiters, 28.4% of the sample were Carefree Risk Types and 22% were Adventurous Risk Types, both of which land towards the Carefree end of the cognition scale and towards the Composed end of the emotion scale. What we know about Carefree and Adventurous Risk Types is that they thrive in environments where risk and opportunity are rife, and aren’t likely to shy away from competition. They tend to be outgoing and relish the adrenaline and excitement of trying new things – and given that the recruitment industry is incredibly competitive and needs a level of confidence, it’s no surprise that the Wary, Prudent and Intense Risk Types aren’t attracted to the profession.

 

 

One of the most extreme examples of occupational Risk Type skew is found in the Auditor profession. Of 198 surveyed Auditors, 36.4% fell into the Deliberate Risk Type, 17.7% into Composed Risk Type and 13.1% into Prudent Risk Type – meaning a huge 69% of the Auditor population fell into just three of the nine Risk Types. Just 2% of Auditors were Carefree, 4% were Excitable and 3% were Intense. The results show that Auditors are much more likely to score on the calm end of the emotion scale, towards Composed, and are also likely to score on the Prudent end of the cognition scale. Auditors in the Deliberate, Composed and Prudent Risk Types are characterised by methodical thinking, investigative behaviours and calm, composed emotions – all of which clearly support an effective career as an Auditor where thoroughness and composure are highly valued.

 

[H4] Risk Type & decision making

One of the most useful applications of risk psychology in the workplace is increasing individual awareness of risk. Just like every other area of psychology, being aware of how your brain works and what your natural tendencies are towards risk and decision making is incredibly valuable.

For individuals in coaching situations, understanding their Risk Type often helps them to start making more informed decisions – rather than just going with their gut reaction. If a leader understands that they’re likely to be impulsive and attracted to risk, they’re able to build processes that will help to mitigate their impulses or surround themselves with people who bring a different perspective to the decision making process. 

Similarly, if an individual knows that their Risk Type is likely to make them resistant to taking risks, understanding that fact will help them to start recognising where their Risk Type is holding them back or making decisions that might not be the best for the organisation.

Risk Type and teams in the workplace

Another interesting application of risk psychology in the workplace is within teams or departments, where interactions between individuals with differing Risk Types can lead to conflict or imbalance.

Assessing the Risk Type of each team member, the Risk Type Compass Team Report allows teams to begin increasing their understanding of the differing viewpoints in their teams. Risk Types view the world and their decision making processes very differently, so the first step in any team development project is to educate the team on their individual Risk Types and those of their colleagues.

Particularly for teams struggling with interpersonal friction, an intervention using risk psychology can be illuminating. There’s no perfect mix of Risk Types for a team, but knowing where the centre of gravity lies can facilitate better understanding and more effective communication.

In a team where individuals are distributed evenly across the Risk Type Compass, with one or two team members in each Risk Type, decision making processes should theoretically be fairly balanced. But the challenge for an evenly distributed team is often communication and understanding between Risk Types. The more Adventurous, Carefree and Composed Risk Types might get frustrated by the Intense, Wary and Prudent Risk Types, who they see as holding up decision making and spending too much time focusing on the potential negative consequences.

By acknowledging that their perceptions of risk differ, these conflicting Risk Types can learn to communicate better with each other and make more balanced decisions, without interpersonal conflict.

For teams where there is a definite skew in one direction, awareness of Risk Type becomes even more important and effective. If a team is highly skewed towards the Wary side of the Compass, decision making is likely to be a long and laboured process, while teams skewed towards the Adventurous side of the Compass are likely to be more gung-ho and impulsive.

Neither skew is better or worse than the other, but the important thing to remember is that awareness of this risk psychology skew can help to strengthen the group dynamics, mitigate potentially bad decision making, and increase resilience too.

Ultimately, understanding risk psychology at the team level is a highly effective way of improving communication and reducing interpersonal conflict, because team members become more aware their personal strengths and blindspots and become more tolerant of the blindspots of their colleagues too.

How to start harnessing risk psychology in the workplace

Hopefully by now you’re fully convinced that understanding risk psychology both at an individual and team level can be hugely beneficial for organisations – but how do you start using Risk Type to facilitate organisational progress?

The answer is simple: get qualified in the Risk Type Compass!

The Risk Type Compass is a comprehensive risk psychology tool backed by over a decade of research into risk psychology, decision making and organisational change. It’s an incredibly reliable tool and can be applied to any industry, any organisation and any people-based concern – and is particularly useful for managing organisational change, risk culture and team development, as we’ve seen.

At KinchLyons, our Risk Type Compass certification workshops are available online on-demand so if you’re keen to add risk psychology to your people development arsenal you’re in the right place!

Head over to our Risk Type Compass page to see how risk psychology can make a difference to your organisation! And if you enjoy a good technical manual and fancy diving deep into the data behind the Risk Type Compass, take a look at the Risk Type Compass Technical Manual.