In his book, Freakonomics, Steven Levitt has an excellent chapter on risk. He quotes risk consultant, Peter Sandman who said, “That basic reality is that the risks that scare people and the risks that kill people are very different.”

Sandman uses a simple definition of risk.

Risk = Hazard + Outrage

For example, Levitt poses the question of which house you’d be more comfortable allowing your child to play – one with a swimming pool or one with a gun. The hazard, death, is the same. The data tells us that considerably more children die from swimming pool accidents each year. Yet most people would consider the home with the gun more “risky”. Levitt’s rationale

“. . .The thought of a child being shot through the chest with a neighbor’s gun is gruesome, dramatic, horrifying – in a word outrageous. Swimming pools do not inspire outrage.”

Sandman and Levitt’s models also apply at work. Decisions to speak up, take certain actions, or do many of the things that we encourage (yet often don’t see) are driven by perceptions of risk.

The key is to understand what role you, as a leader, play in people’s perception risk. Levitt discusses three drivers of individual’s perceptions of risk and outrage: sense of control, reaction and immediacy.

Control
We tend to see things that are out of our control as being more risky. That’s human nature. Yet, organizations often hold people accountable for things that are out of their control. When this happens, people seek ways to reduce that feeling of risk. Often their risk-averting behaviors become destructive to the organization.

A simple example is the classic “shoot the messenger” syndrome. When bringing bad news becomes a risk, people stop reporting it. That’s when the real risk arises.

A more complex example is in goal setting. In one company sales people’s goals included product quality. Yet the sales people had no control over any aspect of the production process. Levitt points out that we typically feel at less risk when we are the ones perfoming a task. (Do you feel safer in the driver or passenger seat of your car?) To reduce their perceived risk, the sales people attempted to assert some control. They began micro managing the production managers. This prevented the production managers from fully focusing on their jobs. Sometimes the sales people would go around the production managers talking directly to supervisors and employees. By giving them a goal over which they had no control, the organization increased these people’s perception of risk. The result was dysfunctional behavior and performance.

The current economic climate affects business in ways that are completely out of anyone’s control. Your reaction can either fuel or reduce people’s perception of personal risk.

Reaction
Levitt’s swimming pool example is about how reaction impacts our perception of risk. The gun evokes a stronger emotional reaction than the pool. Therefore, the gun is perceived as riskier.

Leaders’ reactions drive employee perceptions of risk. How do you react to mistakes, wrong answers, or dissention? Are you aware of the level of “outrage” you display in response to various actions and behaviors?Of course, there are actions that should generate outrage – unethical behavior, lack of integrity, illegal behavior. Actions that lead to significant losses or hurt the business should also create outrage. The point isn’t to tolerate any level of performance. Yet sometimes we invent or magnify the “hazard” reacting disproportionately to its real damage.

I knew an executive who extremely detail oriented. This person could comb through a 25-page document and find every typo, inconsistent font, or inconsistent color. He did this even on rough drafts, before the content was even final. Not only did he find the errors, he made a big deal about them. People knew that a less than “perfect” presentation would generate outrage. They adapted their behavior. If someone had an hour to work on a presentation, they’d spend ten minutes on content and 50 minutes proofreading. The documents looked great, but most of them didn’t say much.

Or, consider how new ideas are received in meetings. Ideas that are too far out of the status quo are often ridiculed. Yet, if we consider the risk equation, stating an idea really poses no hazard. Yet for some, just speaking can be a risk. Employees quickly learn that staying within a very narrow boundary decreases their risk.

Another risk-creating behavior stems from hoarding data. The leader holds back information to later use as a weapon against ideas he or she doesn’t support. Alternatively, perhaps an employee simply overlooks a piece of data. The leader’s response in that situation determines the perceived level of outrage. If missing a piece of data results in a reprimand, people will soon stop bringing ideas or recommendations to the table. Instead they’ll regress to just providing simple facts and information. Look at your meeting dynamics. Are people comfortable asserting their point of view? Do they go out on a limb? Or, do your people stick to the facts? If people are playing it safe, it might be time to reassess where they perceive the risks.

Immediacy
Levitt’s finaly point is that a current issues often appears more risky than a future issues. Stephen Covey made a similar point when he talked about “Quadrant I” and “Quadrant II” activities – those activities that are either urgent/important or not urgent/important. He notes that we often spend more time on the first quadrant (urgent/important) at the expense of the second quadrant. I’ve even found people who spend considerable time third quadrant (urgent/not important). This reinforces Levitt’s point of the power of immediacy in our perception of risk.

Sometimes the problems that are right in front of us do need fixing. If your house is on fire, that’s not the time to be focusing on how to decrease the risk of fire.

However, that’s not always the case. There is an on-going debate about whether short-term, quarterly based decision making improves or hampers organizational performance. In tough times, like the ones we are in now, many organizations forego investing in longer term risks in order to address short term issues. Fiscal responsibility is important but it must be balanced. If your actions cause you to lose customers in the short term, you might not have anyone to buy your product once things pick back up. If you get back on your feet, a workforce that can’t provide a quality product or service, a customer base that no longer remembers your brand, and a portfolio of old, outdated products will probably put you right back into the same place you started.

As a leader, you influence your employees’ perceptions of hazard and outrage
Too often, leaders make the very behaviors they seek carry the greatest risk. There are certainly times when people should feel at risk. It’s ok to be outraged at shoddy work or incompetence. However, shoddy work and incompetence are very different from results that are outside of people’s control or are due to honest mistakes.