Effective risk management requires a range of risk personalities, say Russell Beaumont and Geoff Trickey
We all know the jokes; the actuary who found accountancy too interesting, or the extrovert actuary who stares at your shoes. But is there any grain of truth behind these stereotypes?
Could you tell which hidden aspects of personality are most likely to characterise members of the actuarial profession?
Let's approach it from another angle. Imagine you're on a typically packed, delayed commuter train and picture those around you. One is highly agitated and anxious in the hot and crowded conditions. A more experienced commuter remains relaxed, apparently oblivious to the circumstances. Another is clearly excited by the situation and in everything going on around them. Yet another is double-checking timetables and appointments, anticipating a missed connection and planning accordingly. These people all react differently to the same circumstances; reacting in accordance with their personality characteristics and their risk dispositions. But which one is the actuary?
Now imagine these same commuters coming together in a boardroom. How does the interplay of their risk personalities affect the big decision they are grappling with?
The importance of risk-taking behaviour
Organisational culture, board decisions and managerial relationships all play their part in striving for a fruitful balance between opportunity and risk. Corporate prosperity and survival depend on it.
After the 2007-8 crisis, researchers studied the riskiness of strategies across the banking industry, looking to understand what drives the different approaches. They followed 1,578 senior bankers at 165 banks over a 19-year period, including the financial crisis. They found that the personalities of the senior bankers far out-ranked any other factor in explaining the risk-taking policies, including compensation and bonus structures.
This study supports the strong consensus that effective risk management requires a strong risk culture within the wider organisation, and one which starts at the very top. In its 2017-18 business plan, the Financial Conduct Authority highlights a clear link between poor culture and poor conduct, and emphasises the need for organisations to continue to embed cultural change.
Assessing risk-taking dispositions
Psychological Consultancy Ltd identifies 23 different aspects of personality that contribute to risk-taking behaviour. These themes combine to form eight distinctive 'risk types'. Your risk type reflects your natural disposition - to what extent you are, for example, usually optimistic or apprehensive, or a careful planner rather than being spontaneous. Risk type is deeply rooted and influences how much risk a person is willing to take, how much uncertainty they can cope with and how they react under pressure or when things go wrong. An assessment places you in one of these categories on the Risk Type Compass®.
The Risk Type Compass®
'Composed risk types' have an unusually high threshold for the perception of risk, deal well with stress and are a steadying influence through challenging times. They look at unfamiliar or unexpected events with interest, and their optimism leads them to embrace new possibilities. As a result, they take risks and are open to new opportunities that may otherwise have been missed.
Compare that with 'intense risk types' on the opposite side of the dial. They invest enthusiastically in people and projects but are anxious that things will go wrong. They are alert to danger and are not easy to reassure. The unfamiliar and unexpected unsettle them, and their reactions can be visceral and passionate. They provide an early warning system, because they tend to perceive the threat in any situation, but can easily lose sight of potential opportunities.
Extreme examples of these two risk types can seem like aliens to each other. It will appear that their counterpart continually takes the opposite view, seems to delight in frustrating their efforts, and creating unnecessary tension and conflict.
Milder versions of each risk type fall towards the centre of the compass. The great advantage of these axial people is that they share enough of every risk type to understand all dispositions, giving them a unique perspective from which to evaluate, moderate or arbitrate within the group dynamic of risk-related decision-making.
Actuaries and the compass
The eight categories, plus the axis, are roughly evenly distributed among the general population. However, certain job roles are more likely to attract and retain individuals who exhibit particular personality characteristics. Auditors are more likely to be deliberate or composed types than the general population, whereas recruitment professionals are often carefree and IT professionals can be adventurous. For stock traders, it depends on their particular specialism.
Following the IFoA's Risk, Investment and Pensions Conference in June, about 170 actuaries completed the Risk Type Compass® assessment (see above diagram).
As we see, the distribution of actuarial risk types is not too far away from the distribution among the general population. Perhaps as a group we are a little less deliberate and a little more wary. But we can be any of the characters on that train. There are adventurous actuaries, excitable actuaries and even carefree actuaries. Compare that to a sample of air traffic controllers, where over 75% were classified as deliberate.
Building a strong risk culture
The Prudential Regulation Authority's June 2017 consultation paper CP8/17 encourages greater challenge and robustness in decision-making through "having sufficient diversity of approach, skills and experience on the board". The balance of risk types is a significant factor in establishing expectations and setting the parameters of caution and venture. A group that is predominantly risk taking by nature will tend to amplify their risk taking. Similarly, a group that is mostly risk averse will reinforce each other's natural caution. Since organisational failure typically involves either taking too many or not enough risks, the possibility of polarised risk-taking functions should be a concern for all stakeholders, not just the Prudential Regulation Authority.
Corporate culture develops incrementally over time from the attributes and preferences of its employees. It is largely a legacy of previous generations, and moderates any tendency to deviate from the status quo. So changing the culture is never easy. It must operate through today's incumbents; something that requires a lot of work with individuals and teams.
In building a strong risk culture, there are no good or bad risk types - each has its own benefits and disadvantages. There is a need for the questioning views of the carefree, the intrepidness of the adventurous, the purposefulness of the deliberate, the conservativism of the prudent, the motivated vigilance of the wary, the desire of the intense and the passion of the excitable. No one person can deliver all of this, so risk dispositions add another dimension for diversity and inclusion.
Once team members know their own risk type characteristics, they have a common basis for sharing and discussion. Mapping the team's profile evaluates the influence of different personality clusters and outliers; the potential for factions and divisions in the group, the absence of impact from some risk types and the over-representation of others, and provides the basis for developing action plans. Those working in risk functions may need to adapt their approach to establish working relationships and communicate effectively with people whose risk disposition may be very different from their own.
For actuaries, there appears to be no particular risk type strongly permeating our profession. But self-awareness, and an awareness of the risk personalities on the other side of table, can only improve the effectiveness of our risk management activities. Risk personalities are the natural place to start.
Russell Beaumont is an independent consultant specialising in customer behaviour
Geoff Trickey is managing director of Psychological Consultancy