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Governance Reimagined: Organizational Design, Risk, and Value Creation by David R. Koenig

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Chapter 7

The Human Reaction to Risk

In our Value Equation, a higher level of perceived risk increases the denominator, or the discount factor, and lowers the value of that good or service to us today. In Chapter 6 we discussed how people's perception of value can be biased by many factors, including the risk of large losses, discounting that varies with time, and the introduction or realization of risks that were never considered possible up to that point.

In this chapter we build on the impact that this risk has on value by identifying some of the factors that cause us to believe that risk exists, how we try to cope with the presence of risk, and how we react to risks that are nearly or actually realized.

The Perception of Risk

People considering an economic interaction with our organizations need to assess the value today of a current, future, or ongoing relationship with us. A critically underappreciated element to the discount factor they use to arrive at that value is the perceived risk we present to them. In other words, they consider the risk that the amount of utility actually received in the future might be different from what is expected today. Do you recall the cleaning company that offered to clean our house for the coming year? The uncertainty we felt over the viability of the company made us less likely to do business with it; on the other hand, we'd be willing to pay more if we had greater confidence in the company's ability to deliver all services as promised. ...

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