Book Review: Taking Risks: The Management of Uncertainty.

Kenneth R. MacCrimmon and Donald A. Wehrung, with

William T. Stanbury. New York: Free Press, 1986. 380 pp

Camerer, Colin F.

English

Caltech Authors - Main

Review: [untitled]
Author(s): Colin F. Camerer
Source: Administrative Science Quarterly, Vol. 33, No. 4 (Dec., 1988), pp. 638-640
Published by: Johnson Graduate School of Management, Cornell University
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The final five chapters make up Part 3 of the book, the "Mu- 
tual Accommodation Process." Important topics such as 
boundary roles, accommodation, conflict, networks, and cul- 
ture are explored. The discussion of public sector organiza- 
tions interfacing with other constituencies is creative, and the 
network chapter provides a helpful summary of the sociolog- 
ical work in that area in the 1960s and 1970s. A more thor- 
ough consideration of the conditions that affect various types 
of accommodation would improve chapter 8. The chapter on 
conflict would benefit from inclusion of the literature on ne- 
gotiation, and the chapter on culture should be updated, given 
an era of global markets. 
Integrative books analyzing a field as complex as the study of 
organizations are difficult to write. Although handicapped by a 
number of shortcomings, this book could be useful for new 
students of organizations interested in sampling many of the 
key works or as a reference book for those already familiar 
with the field. 
Ellen R. Auster 
Associate Professor 
Graduate School of Business 
Columbia University 
New York, NY 10027 
REFERENCE 
Astley, W. Graham, and Andrew 
Van de Ven 
1983 "Central perspectives and de- 
bates in organization theory." 
Administrative Science Quar- 
terly, 28: 245-273. 
Other Reviews 
Taking Risks: The Management of Uncertainty. 
Kenneth R. MacCrimmon and Donald A. Wehrung, with 
William T. Stanbury. New York: Free Press, 1986. 380 pp. 
$25.95. 
Business executives think about risk differently than theorists 
do. Theorists have been rather unresponsive to this gap, 
perhaps because there are few carefully collected data on 
how executives think about risk. This book, however, is full of 
data, taken from 500 high-level Canadian and American exec- 
utives. 
In expected utility theory, attitudes toward risk are captured 
by curvature of the utility function: since a risk-averse person 
always dislikes increasing variation of possible outcomes, 
variation is a natural measure of risk. Executives think of risk 
much differently. To them, risk involves dimensions like the 
potential and magnitude of loss, controllability, and knowl- 
edge. 
MacCrimmon and Wehrung measured risk taking in many 
ways. They used four sets of standardized questions with a 
theoretical grounding, like ranking financial gambles with clear 
probabilities and outcomes. They also used several "natural" 
measures of risk taking, like psychometric measures of in- 
ternal control drive and self-reported gambling behavior, and 
638/ASQ, December 1988 
Book Reviews 
they measured personal characteristics like age. Their con- 
cern is how well different risk-taking measures correlate with 
theoretical measures like variation and with other measures. 
The most distinctive part of the book, chapter 3, offers sub- 
jects a series of simple pairwise choices (e.g., a loss of $.8 
million vs. a .5 chance of losing $1.6 million) disguised in vi- 
gnettes as "in-basket memos" to a fictional boss. A lot is 
learned by having executives comment on how they would 
handle the problems that have these pairwise choices at their 
core. They typically don't make a simple choice; they stall, 
look for more data, and bargain when possible. When they do 
choose, they take substantially more risks than when facing 
gambles stripped of context, especially when taking a risk is 
the only way to prevent a loss. 
Their other standardized instruments are more typical, plain 
gambles for (real!) money. Such gambles are as basic to de- 
cision-making research as fruit flies are to genetics, but the 
status of their subjects and the stakes involved (including 
$200 losses and $400 gains) are unique. Their findings here 
replicate many well-known results: People are mostly risk- 
averse; expected return is an important determinant of choice 
(in chapter 5, the only determinant); and executives do not 
always minimize variation-they like it when potential loss is 
fixed or when they are choosing among gambles with only 
good outcomes. 
These observations are hard to reconcile with expected utility 
theory or with axiomatic generalizations of it that are fashion- 
able in economics (Machina, 1987; Camerer, 1988a). The au- 
thors suggest that a multidimensional concept of risk is 
needed: People trade off expected return and "degree of 
threat," which includes likelihood and magnitude of loss con- 
trollability, etc. In much the same way, Slovic, Fischhoff, and 
Lichtenstein (1980) found that the public worries about many 
features of technological risks other than expected lives lost 
(the policymakers' criterion), such as the dread and fear 
caused by a risk and the magnitude of potential disaster. The 
careful identification of the analogous factors in executives' 
judgments of riskiness, like that in chapter 4 here, and the link 
between judgments of riskiness and choice-the tricky part 
-are important contributions. 
An important theme in the book is the intercorrelation of 
various measures of risk taking. Measures from the same in- 
strument or closely related instruments (e.g., measures of 
sensation seeking and control drive, widely used by psychol- 
ogists) are modestly correlated, as we would hope. Different 
instruments and natural measures are only weakly correlated 
(around .10, though many are statistically significant). Like 
most personality traits, risk taking appears to predict poorly a 
person's behavior across situations (cf. Camerer, 1988b). 
MacCrimmon and Wehrung report several striking correla- 
tions between risk taking and personal characteristics. 
Younger, better-educated, and richer executives with fewer 
dependents and more authority take more risks. The question 
of causality raised by these correlations is fascinating-Does 
corporate success create risk taking or vice versa?-but is 
impossible to answer with their data. The original motive for 
the study was to learn whether Canadians take fewer risks 
639/ASQ, December 1988 
than Americans. Executives of both nationalities believe this 
myth, but it is not true. Their myth-busting result is not due to 
weak test power, because other stereotypes do hold: 
Bankers take fewer risks, venture capitalists more. 
The study is thorough and careful. Critics sometimes say of a 
lavish big-budget movie, "You see the money on the screen." 
You can see the time this book took-more than a decade- 
on its pages. Painstaking technical notes are sprinkled 
throughout the text, set in smaller type so the nontechnical 
reader can avoid them more easily. References to related 
work are extensive. These features make the book required 
reading for graduate students and specialists interested in 
managerial behavior or choice theory. They will find no better 
example of empirical work, with much helpful detail about 
sample design and instrument construction, including a 30- 
page appendix of selected instruments. 
Managers may not find the entire book so useful, except for 
chapter 12, which is a do-it-yourself kit for assessing risk- 
taking propensity. Most of the writing is methodical and 
straightforward, and spiceless lists of results are common, 
especially in later chapters. Summaries of many of their 
findings, however, can be found in MacCrimmon et al. (1980), 
MacCrimmon and Wehrung (1984), and March and Shapira 
(1987). 
MacCrimmon and Wehrung have done an important study. 
They offer no simple formula for understanding risk, but they 
offer evidence that no simple formulas will do and some sug- 
gestions for how to complicate the simple formulas. 
Colin F. Camerer 
Assistant Professor of Decision Sciences and Management 
The Wharton School 
University of Pennsylvania 
Philadelphia, PA 19104 
REFERENCES 
Camerer, Colin F. 
1 988a "An experimental test of sev- 
eral generalized utility theo- 
ries." Journal of Risk and 
Uncertainty, 1: 359-402. 
1988b "Illusory correlations in per- 
ceptions and predictions of 
organizational traits." Journal 
of Behavioral Decision 
Making, 1: 77-94. 
MacCrimmon, Kenneth R., William 
T. Stanbury, and Donald A. 
Wehrung 
1980 "Real money lotteries: A study 
of ideal risk, context effects, 
and simple processes." In T. S. 
Wallsten (ed.), Cognitive Pro- 
cesses in Choice and Decision 
Behavior: 155-177. Hillsdale, 
NJ: Lawrence Erlbaum. 
MacCrimmon, Kenneth R., and 
Donald A. Wehrung 
1984 "The risk in-basket." Journal 
of Business, 57: 367-387. 
Machina, Mark 
1987 "Choice under uncertainty: 
Problems solved and un- 
solved." Journal of Economic 
Perspectives, 1: 121 -154. 
March, James G., and Zur Shapira 
1987 "Managerial perspectives on 
risk and risk taking." Manage- 
ment Science, 33: 1404-141 8. 
Slovic, Paul, Baruch Fischhoff, and 
Sarah Lichtenstein 
1980 "Facts versus fears: Under- 
standing perceived risk." In 
R. C. Schwig and W. A. Albers, 
Jr. (eds.), Societal Risk As- 
sessment: How Safe is Safe 
Enough?: 181-216. New York: 
Plenum. 
640/ASQ, December 1988 


Taking Risks: The Management of Uncertainty

1 988a &quot;An experimental test of several generalized utility theories.&quot;

Choice under uncertainty: Problems solved and unsolved.&quot;

Facts versus fears: Understanding perceived risk.&quot; In

Managerial perspectives on risk and risk taking.&quot;

Wehrung

Wehrung 1980 &quot;Real money lotteries: A study of ideal risk, context effects, and simple processes.&quot;

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