Risk tolerance is one of the most important concepts when it comes to issues related to investing and decision-making in business (Grable & Lyons, 2018). Therefore, it is paramount for entrepreneurs to properly assess their risk tolerance and the risk tolerance of their companies in order to make informed decisions which would allow for gaining favorable outcomes. The current paper discusses several problems pertaining to risk tolerance, such as the common pitfalls related to risk tolerance and their relationship to critical thinking, and some ethical issues that might arise when dealing with risk tolerance.
The Manner in Which the Common Pitfalls in Identifying Risk Tolerance Reflect Basic Features of Critical Thinking
There exist a number of pitfalls in assessing risk tolerance. For instance, some individuals might focus excessively on the adverse sides of an investment due to their desire to avoid negative outcomes; in contrast, others might be overoptimistic, assuming that a chain of positive events is the one that is most likely to happen (Hammond, Keeney, & Raiffa, 1999, pp. 155-156). This reflects basic critical thinking because in the latter, it is paramount to adequately assess both the positive and negative aspects of an issue.
Some other pitfalls are related to ignoring considerable amounts of uncertainty, or distorting the actual risks to make them appear more favorable (Hammond et al., 1999). In the latter case, for instance, one may dismiss certain risks as unlikely and/or not severe while simultaneously concentrating on positive outcomes and viewing them as more probable. This also reflects the basic features of critical thinking, for to think critically, one needs to adequately estimate the gaps in their knowledge, as well as to consider the actual facts instead of distorting them in one’s favor.
Another common pitfall is related to avoiding making decisions that are risky due to the fact that these decisions are complex (Hammond et al., 1999, p. 156). In such a situation, one may evade making any decisions at all, make a decision which is completely arbitrary, or have someone else make that decision (Hammond et al., 1999, p. 156). This also reflects that feature of critical thinking according to which it is pivotal to take into account all the relevant aspects of a situation in their complexity instead of simply avoiding facing this complexity.
The Manner in Which Uncertainty and Low Awareness of Risk Tolerance Influences Adhering to Ethical Principles
There are a multitude of ways in which uncertainty, as well as being poorly aware of risk tolerance, may have an effect on taking into account the ethical issues in business. On the whole, not being aware of risk tolerance or not being certain about risks may cause individuals and organizations to make decisions that are potentially harmful to others, especially if there is a need for an urgent decision (Grable & Heo, 2017; Hemrajani & Sharma, 2018). This is especially true for decisions that carry significant risks for people. For instance, uncertainty about the risks of creating a factory that significantly pollutes the environment might mean that such a factory is built and that the resulting pollution has a profoundly adverse impact on people living in nearby settlements, or even on the ecosystem of the whole planet (e.g., in case with nuclear power plants). Poor awareness of risk tolerance may also result in a breach of ethical principles; for instance, if risk tolerance pertaining to making certain medications is low, but the manufacturers are oblivious of this, there might exist a high probability of harming persons who will take these medications in the future. Thus, generally speaking, uncertainty or lacking awareness of risk tolerance might lead to non-adherence to ethical principles, for instance, the principle that one must not cause harm to individuals and populations.
Comparing the Ethical Dimension and Some Other Dimensions Involving Risk Tolerance
It might be possible to state that when it comes to issues related to risk tolerance, the ethical dimension of these issues is similar to other their dimensions in some ways, but different in others. For instance, it is similar to the dimension pertaining to potential losses sustained in the case of failure. If the risks were underestimated, the decision-maker may suffer from heavy losses if they failed; similarly, when it comes to the ethical dimension, other stakeholders may also suffer. On the other hand, the ethical dimension is dissimilar when it comes to profits or benefits; if a decision-maker took a risk and won, they enjoy the benefits of their victory, whereas other stakeholders (the ethical dimension) may enjoy these benefits, may not enjoy them, or may even find themselves at a disadvantage. Therefore, it is apparent that when it comes to situations involving uncertainty and risk tolerance, the ethical dimension may need additional attention because other stakeholders may often have something to lose if a decision leads to a failure, and might have nothing to gain if that decision proves to be successful for the person or entity that made it.
Conclusion
All in all, it should be stressed that risk tolerance is of paramount importance when it comes to making decisions in business. In order for business decisions to be successful, it is pivotal to properly assess one’s risk tolerance and take it into account when making decisions. It is also critical to consider all the relevant aspects of the issue the decision about which is to be made so as to avoid the common pitfalls related to risk tolerance, as well as to avert breaching ethical principles and causing harm to other stakeholders.
References
Grable, J. E., & Heo, W. (2017). Insights into the relationship between risk tolerance and market volatility. Journal of Financial Service Professionals, 71(1), 17-20.
Grable, J. E., & Lyons, A. C. (2018). Exploring the theoretical and methodological issues surrounding the relationship between risk tolerance and wealth accumulation. Journal of Financial Service Professionals, 72(1), 11-15.
Hammond, J. S., Keeney, R. L., & Raiffa, H. (1999). Smart choices: A practical guide to making better decisions. Boston, MA: Harvard Business School Press.
Hemrajani, P., & Sharma, S. K. (2018). Influence of urgency on financial risk-taking behavior of individual investors: The role of financial risk tolerance as a mediating factor. IUP Journal of Applied Finance, 24(1), 30-43.