A PARTIALLY
MEDIATED ORGANIZATIONAL-LEVEL MODEL OF THE DETERMINANTS OF RISKY
DECISION MAKING
Sitkin
and Pablo (1992) suggest a research agenda guiding future research
on risky decision making by individuals but note many of the hypotheses
represented by the model "... may be equally applicable to
organizations as decision making entities" (p. 32). Our study
tests part of their model at the organizational level and we examine
4 of the 5 constructs considered by Sitkin and Weingart (1995).
However, in contrast to Sitkin and Weingart, we a) investigate
the effects of inertia rather than outcome history as an antecedent
predictor and, b) predict risk propensity and risk perception
will partially rather than fully mediate the effects of our antecedent
variables.
Figure 1 captures many of the key ideas reflected in Sitkin and
Pablo's (1992) model and depicts our direct and mediated effect
hypotheses (path coefficients noted in the figure are addressed
in results section). In contrast to their model, Figure 1 suggests
that the effects of the 2 antecedent characteristics studied (i.e.,
inertia and problem framing) are partially mediated by risk propensity,
risk perception or both.. Beginning with the dependent variable,
riskiness of decision making, we move left in Figure 1 to define
variables in our model and introduce hypotheses.
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Insert Figure 1 about here
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Riskiness of decision making varies with the degree of risk associated
with decisions made. Individual decisions are riskier to the extent
that a) their expected outcomes are more uncertain and their is
a potential for great loss, b) decision goals are more difficult
to achieve, c) the potential outcome set includes some extreme
consequences (Sitkin & Weingart, 1995). Definitions of decision
risk at the organizational level (e.g., Baird & Thomas, 1985)
reflect these same ideas suggesting conceptual equivalence in
this construct across level.
Sitkin
and Pablo (1992) contend that risk propensity, the tendency to
take or avoid risks, is a relatively stable characteristic but
can be modified through experience. Risk averse individuals overestimate
the probability of loss which deters risk taking whereas risk
prone individuals underestimate the probability of loss which
encourages risk taking. This positive association between risk
propensity and risky decision making by individuals is expected
to translate to organizations through top management teams (TMTs).
Extrapolating from Hambrick and Mason's (1984) upper echelon model,
we assert the typical risk propensity of TMT members will explain
significant variability in the riskiness of organizational decisions.
Risk
perception, the perceived degree of risk inherent in a situation,
has been the subject of considerable attention due to its expected
impact on risky decision making behavior. The perception of risk
by individuals and organizations alike is related to a number
of factors such as the perceived controllability of outcomes (e.g.,
Baird & Thomas, 1985) and risk propensity (e.g., Sitkin &
Pablo, 1992).
Hypotheses
Our
model posits that risk propensity and risk perception partially
mediate the effects of inertia and problem framing, on risky decision
making behavior. Our specific study hypotheses are discussed below.
Individuals
(MacCrimmon & Wehrung, 1986), like organizations (e.g., Douglas,
1985), develop predictable patterns of response to risk. The effects
of these inertial patterns are non-trivial and can "..transcend
changes in situational risk" (Sitkin & Pablo, 1992, p.
17). Our first hypothesis (H1), therefore, predicts: Organizations
with inertial response patterns that are risk-seeking will be
more likely to make risky decisions than organizations with inertial
response patterns that are risk-avoiding.
The
notion that organizations tend to seek out and retain managers
that subscribe to key organizational values and philosophies (e.g.,
Miles & Creed, 1995) implies a link between inertia and the
risk propensity of TMTs (e.g., firms with inertial response patterns
which are risk seeking (risk avoiding) will attract managers who
are risk-prone (risk averse)). In light of this logic, our second
hypothesis (H2) predicts: There will be a positive association
between risk-seeking inertia and the top management team's risk
propensity.
Research
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