Personality Type and Risk Appetite
Nervous CEOs take fewer risks.(originally published by Booz & Company)
Title: Too Negative to Take Risks? The Effect of the CEO’s Emotional Traits on Firm Risk (Subscription or fee required.)
Authors: Juan Bautista Delgado-García, Juan Manuel de la Fuente-Sabaté, and Esther de Quevedo-Puente (all affiliated with Universidad de Burgos)
Publisher: British Journal of Management, vol. 21, no. 2
Date Published: June 2010
A great deal of research in recent years has focused on how firms balance risk in their decision-making processes and pursuit of profit. But the authors of this study went a step further and examined whether the personalities of CEOs at banks affected the level of financial risk their institutions were willing to embrace. The paper concluded that CEOs with so-called negative personalities — anxious or nervous types, for example — were less likely to take risks. Education also played a role in risk appetite: CEOs with higher levels of education were more likely to embrace chancier loan portfolios. By contrast, the executive’s tenure or maturity had no bearing on risk taking.
The study was based on a 2004 survey sent to all the managing directors and general directors of 70 Spanish investment banks and 46 savings banks; on average, the respondents had spent 25 years in the industry and had served at least a decade as CEO. The questionnaires measured the executives’ demographics and personalities on a commonly used scale that divides emotions into positive traits (such as interest and enthusiasm) and negative ones (such as excessive worry and irritation). The primary goal of the research was to explore risk management in companies. Banking offered the best vehicle to do so because not only is risk management a central focus among financial-services executives and regulators, but readily available financial reports provide valuable information on the risk characteristics of bank loan portfolios. To measure the level of economic risk faced by the banks, the researchers examined annual and quarterly reports between 2001 and 2006.
The research has several implications for managers and firms. The authors argue that the personality traits of prospective CEOs — and the way they could affect the risk propensity of the company — should be carefully considered during the selection process. Moreover, managers themselves should be keenly aware of how their own traits can influence their strategic choices, and in some cases be prepared to go against their instincts. In industries with an aversion to risk taking, such as the financial-services sector, a chief executive with a negative personality could be a perfect fit.
Bottom Line: The level of risk that an organization assumes over time is directly related to the CEO’s personality. Executives with negative personalities, exhibiting nervousness or worry, are less likely to take risks that generally prove to be unfavorable.
- Matt Palmquist was a founding staff writer and is currently a contributing editor at Miller-McCune magazine. Formerly, he was an award-winning feature writer for the San Francisco–based SF Weekly.