Hard Times Can Inspire Wrong Type Of Risk Taking

When faced with declining profits and bleak outlooks, one way for executives to respond is through increased risk taking. In fact, researchers have consistently found that executives who find themselves in undesirable situations tend engage in more risk taking than executives in more desirable situations. Given the current financial environment, more and more executives may look to risk taking as a way to escape disaster. However, a recent study I conducted with colleagues from the University of Miami and Arizona State University found that not all risk taking is the same, and the risks that executives in lower-performing firms take tends to harm, rather than improve, firm performance. In contrast, executives in higher-performing firms tend to take risks that improve performance.