Thursday, 18 October 2018
In the last few months I have met few promoters and top management of the companies going through adverse situations in their companies. Adverse situations are very taxing for them and for the people around. The people around take maximum brunt of the decision making of the senior management and promoters. My presumption was that, when somebody faces adversity, their risk appetite reduces. They will not attempt to take brash, high risk decisions that border on gamble. But, I started observing that these executives started taking decisions that increased their risk profile. Why this paradox? Or is this a paradox at all. Further, when they are advised to reduce the risk levels they quickly come to a conclusion that such advises are to be brushed aside.
While I was pursuing my professional course I used to interact with family whose bread winner was mentally not stable, had various health issues and had no regular income. But he was very qualified and well experienced. I used to listen to the stories of his wife who was a home maker patiently for which I used to get my lunch or dinner depending on her mood. I was very concerned for their family and tried to help in various ways within my means. They had a daughter who was 3-4 years then. One day she said that she is carrying with their second one. I was aghast at the decision to have another kid when the situation was so adverse. As a financial guy and genuinely interested in their family I advised that she should cut her risk. She took my advise very lightly and said that the kid would be a son who would pull them out of the issues they are going through. She further said she would invest in stock markets with my help and make enough money for bringing up the kids, if something happens to the man of the family. I was even more shaken with that statement and couldn't but admire the risk appetite she had, compared to her means. The optimism and risk appetite baffled me. See the amount of time that would take the kid to come to their rescue. Though I congratulated her, I was fully convinced that she was further dragging the family into quagmire of issues. I realised first time that the risk appetite increases with adversity.
As I started working in capital markets I went on to see investors after loosing heavily in the stock markets would bet large sums. They used to think that there is no recovery that can happen in small amounts and the recovery has to happen in one or two good occasions. Any advise that did not confirm with their belief was brushed aside or even avoided. Investor behaviour telling me to take higher risks when in adverse situations.
Las Vegas, Macau, Goa casinos, all showed me the same results of human behaviour.
Military situations also showed the same behaviour but with change in tactics with a hope to succeed.
I have not got into statistically collecting data and banked on my recollection of situations, events, investor and gambler's behaviour over the past two and half decades.
So, where did I get to learn that adverse situations reduce risk appetite? Only books taught me. In reality people always behaved the other way round.
There are two parts to increase in risk appetite in adverse situations. One, to restore the position that would take them to the position before the loss or adversity occurred and second, to prove that their decisions are not all that bad and they are capable of hitting back in life. How many have succeeded? Same probability as throwing a coin in the air and asking for heads winning. Majority of such decisions were more emotional, not backed by data but only backed by optimism.
Many times managers and promoters are blamed for adamant behaviour and inflexibility they show in decision making in adverse situations. I am connoting adamant behaviour as negative quality. It is negative as it puts of the people around and even chokes them to the level that their expression of information is taken away. The whole system, in adverse situations, works overtime to bring normality with systematic decisions, which are overridden by the senior executives as they are fixed to pole star that will show them the direction and thus the ground prepared by the team goes for a toss and the senior executives win as they veto all the risk free options. They want that one decision which comes with all the risk to wipe out all the sins and losses and deliver.
To avoid these situations the boards and senior teams quickly take decisions to replace non team players. Organisations want the impact of wrong decisions to be minimised. Some of the large successful companies have the track record of replacing the senior executives for single sided adamant decisions. The cascading effect comes into picture as the organisation becomes larger and larger and becomes extremely difficult to manoeuvre when course correction has to be done. Some organisations have seen adamant decisions of senior management when they are months away from closure. They just don't want to give up. They just want other opportunity to come back. A great quality which everybody wants while recruiting but seldom appreciate and back when such stance is taken.
Some of these decisions are also guided by peer pressure, competition, family pressures. A senior executive got an opportunity to prove himself to a promoter who wanted to trust him irrespective of his continued failure for three decades. The executive didn't want to go slow and showed the same speed at which he took decisions earlier and fell right into the trap of adamant decision making in an adverse situation and got sacked once again. I interviewed him and he gave me a good personal perspective. Having failed time and again he had a great burden to prove to his family that he is the man in-charge of the family as he was getting brushed aside in any family decision making. what further humiliated him was the fact that his friends along with whom he started his career had got into positions where he would take another decade of right decision making to reach. He found this as the best opportunity and put all his efforts and showcased to the family, friends and professionals that he was capable.
Here comes an important point of memory pattern. Sports persons practise every move to just face that one particular moment that they have to decide in split second. A sports person who trained more succeeds more in all kinds of situations. Sully, US pilot who landed in Hudson river, was proved right for his split second decision to land on water. This couldn't have happened if he wouldn't have trained himself for all sorts of situations. Same way the business managers have to continuously train themselves for adversaries to blunt the effect of adamant decisions.
I don't want to comment whether it is advisable for the adamant decisions to be taken or not but a well trained manager can always consider all the angles before he can take a decision. Adamant decisions can also be great boon for companies to turn around their companies, if decided with well trained managers who have seen and trained such situations.