Bernardo A. Huberman
Senior HP Fellow, Director Information Dynamics Lab
Hewlett Packard Laboratories, Palo Alto, CA
Encouraging risk taking in organizations
While most organizations consider taking risks as an essential part of
their success, few have actual policies to encourage risk taking on the
part of their managers. The reasons are manifold, ranging from the often
stated fact that what organizations reward is outcomes, not decisions,
to more subtle assumptions about risk taking that give it a negative
I will present a new mechanism for encouraging risk
taking within organizations that relies on the provision of a form of
insurance to managers. Since insurance also increases the temptation
to free ride on the efforts of others, we also introduce a privacy
preserving monitoring technique that mitigates this moral hazard while
relying on the social network of the insured individual.
We show that under general conditions, three possible regimes exist. In
the first one, managers contribute to production but avoid risky
projects. In the second, members take on risky projects without free
riding. In the third, they free ride. We establish the conditions for
the appearance of each of these regimes and show how one can adjust the
payoffs so as to get the highest expected payoff for the firm in spite
of its risk-adverse individuals.
- Date/Time: Friday, April 22, 2005, 15:00-16:30. Following the speech there will be a reception.
- Place: ETH Zentrum, D-MTEC, Kreuzplatz 5, room K14