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Risk-taking in academic libraries: the implications of Prospect Theory
Tony Horava, AUL (Collections)University of Ottawa
OLA SuperConferenceJan. 28, 2015
Organizational risk Prospect Theory Major principles Implications for risk assessment Implications for academic libraries Conclusion
Outline
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“Society values risk taking but not gambling, and what is meant by gambling is risk taking that turns out badly. From the point of view of managers and a society dedicated to good management, the problem is to develop and maintain managerial reputations for taking "good" (i.e., ultimately successful) risks and avoiding "bad" (i.e., ultimately unsuccessful) risks, in the face of (possibly inherent) uncertainties about which are which.”
James G. March and Zur Shapira, “Managerial Perspectives on Risk and Risk Taking,” Management Science 33, no. 11 (1987): 1413.
Organizational risk
The ARL 2030 Scenarios : A sustained reflection upon the risks and opportunities
for libraries, based on four possible scenarios. It is up to each library to assess the probability of any scenario occurring
“Organizations act on what they know or what they believe they know to be certain. Many of those certainties are in actuality uncertainties. Those false certainties become the basis for an organization’s strategic decision-making. “
Scenario planning: assessing risk
Frames - lenses that filter some things and allow others to pass through, help us order experience.
Each frame comes with concepts and metaphors for organizing our understanding of the world, esp organizational culture
Four frames – Structural; Human resource; Political; Symbolic
Looking at organizations this way can help us assess what is working and what isn’t – and addressing risk in reframing
Bolman and Deal’s Four Frame model (“Reframing Organizations: Artistry, Choice, and Leadership”)
Technological - rapid obsolescence and the hype cycle; inadequate or dysfunctional tools; lack of interoperability with other systems; foreshortened life cycles for development; the quality of maintenance and supportFinancial - the institution’s degree of support of the library; the foreign exchange rate; Ontario’s and Canada’s economic performance; investments made by the institution; the global economy & inflation
Dimensions of organizational risk: some examples
http://wilderdom.com/images/RiskNotTakingRisksCartoon.jpg
Political - institutional strategic agendas shifting in direction; changes in senior administration and therefore shifting loyalties and power
balances; a range of stakeholders in the academy with different/complementary interests; Assessment standards and measurement of impacts; unpredictable directions/pressures for post-secondary education; new governments with new agendas
Socio-cultural – new patron attitudes and preferences in their use of information and devices; new learning styles based on use of social media and new technologies; new purposes for using library spaces and collections, such as collaborative work shifting demographics that can lead to a new mix of the student population;
Organizational risk (cont’d)
Mental paradigms affect risk assessment and decision-making in libraries. The historian of science Thomas Kuhn asserted that a paradigm is "the entire constellation of beliefs, values, techniques, and so on shared by the members of a given community.” - In a library context, this constellation is typically conservative, reactive,
and risk-averse (but changing…)
The importance of process: "The less things are predictable the more attention you have to pay to the strategy process. Uncertainty has the effect of moving the key to success from "the optimal strategy" to the "most skilful strategy process.” Kees van van der Heijden, Scenarios: The Art of Strategic Conversation vii-viii.
Paradigms and process
“Prospect Theory: An Analysis of Decision under Risk” Econometrica 1979 47(2): 263-291. http://www.princeton.edu/~kahneman/docs/Publications/prospect_theory.pdf
The authors Daniel Kahneman and Amos Tversky, awarded the Nobel Prize for Economics in 2002
Originally applied to behavioral economics; then applied to other contexts
Has led to a more nuanced understanding of how we grapple with uncertainty and make decisions in the face of risk.
Prospect Theory
Probability weighting Reference dependence; Loss aversion; Diminishing sensitivity;
Prospect Theory – basic principles
The role of probability weighting in decision-making is quite crucial.
Typically, “the weighting function overweights low probabilities and underweight high probabilities.” Generally speaking, people are overconfident about expected outcomes related to risk, and make decisions with particular biases
Interview with Daniel Kahneman: ◦ “People systematically violate the predictions of expected utility
theory.”◦ “The emotional tail wags the rational dog”
Probability weighting
People derive utility from gains and losses, measured relative to some reference point, rather than from any absolute standard for economic well-being.
All gains and losses are therefore relative; no one size fits all
Think of your Collections budget, or Operations budget, or staff complement, as the reference point for your library’s experience in any given year – versus previous years.
Reference dependence
Loss aversion - people are much more sensitive to losses—even small losses—than to gains of the same magnitude, eg “people tend to be risk averse over moderate probability gains: they typically prefer a certain gain of $500 to a 50 percent chance of winning $1,000.”
People hate losing much more than they love winning (by a factor of about 2-3 to 1, based on Kahneman and Tversky’s research)
Loss aversion
Replacing a $100 gain (or loss) with a $200 gain (or loss) has a significant utility impact, replacing a $1,000 gain (or loss) with a $1,100 gain (or loss) has a smaller impact.
As numbers scale upward – think of budgets or collections- this implies that we become less sensitive to the impact that variations from expectations can produce
A serial that costs $100 this year and jumps to $500 next year is seen as a dramatic increase, versus a serial that costs $5,000 this year and $5,400 next year. Scale of perception is different.
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Diminishing sensitivity
Kahneman and Tversky asked subjects to choose between the following two options:
A) a 5% chance to win a three-week trip to England, France and
Italy; or B) a 10% chance to win a one week trip to England. 67% of participants chose Option A, and 33% chose B, even
though the odds are in favour of B.
Choices people make…
In a second test, subjects were asked to choose between the following two options:
A) a 20% chance to win a gamble for $4,000; or B) a 25% chance to win a gamble for $3,000 Result: 65% of participants chose Option A, and only 35%
chose B, even though the odds are in favour of B.
More choices…
Collection strategies, eg the possible end of the Big Deal Funding challenges/existential threats The galloping horse of technology Transformation of services Contingencies such as natural disasters Collaborative projects Staffing shortfalls Etc....
In thinking about…
Can these principles be useful in our mental toolkit for decision-making, ie in a climate where increasingly difficult choices will need to be made (coming to terms with losses or tradeoffs)
Prospect Theory can make us more aware of our default ways of understanding risk
It speaks to the importance of making decisions using evidence-based approaches, both for short and long term planning
Implications for risk assessment
http://itsadeliverything.com/wordpress/images//assumption-means-risk.png
Risk is baked in to the academic world, and increasing in intensity with each year
The more aware we are of risk dynamics, the better equipped we are with dealing with tough constraints and choices.
Reviewing the full spectrum of high and low risk events & factors, in relation to our understanding of probability and contingency, is valuable.
Prospect Theory can provide us with some insights on human decision-making under risk. Can this transfer to our world and be useful?
“Risk-taking in Academic Libraries: The Implications of Prospect Theory” Library Leadership & Management 28(2) 2014.
https://journals.tdl.org/llm/index.php/llm/article/view/7055
Conclusion
