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The Risk Aversion Paradox

There’s always been a paradox in economies where the times that generate the best opportunity for risk takers become the times that companies are least likely to take risks.

risk

By Ellen Woods

There’s always been a paradox in economies where the times that generate the best opportunity for risk takers become the times that companies are least likely to take risks. Young, entrepreneurial thinkers often advance because they usually have the least at risk and the most to gain. In almost every modern day post- recession economy, risk taking has driven recovery and recovery has occurred within 20 months of the recession. That’s not the case in today’s markets, and the complicated nature of dis-assembly has contributed to both a sluggish recession and a lack of job recovery.

Although a number of theories have recently been put forth, there’s no doubt that a combination of risk aversion and Fed actions have influenced the recovery as is discussed in this recent article by Hussman Funds (http://www.hussmanfunds.com/wmc/wmc130624.htm).

The article provides an assessment of the impediments within the financial market as they relate to calculated risks that normally result in strategic opportunity. There are a few exceptions, both in sector and geographical performance, but by and large the markets just aren’t moving. Their lack of action might actually have a deeper root as consumers globally, and specifically in the US, become less likely to try new products and services. Investors have been slower to back new ventures, and in some cases have become, at least in the short term, bond dependent. That is very bad news for young entrepreneurs, who are unlikely to be granted funding from traditional financial sources and its very bad news for an economy that needs job creation.

Consumers habits have changed as well as many have become very mission oriented in their purchases and are much more likely to stick with brands and products they know and trust because they have less disposable income. That coupled with the recent trending toward a more heath conscious society and the recent outbreaks of food borne illnesses and import of tainted products, as well as the foreign outsourcing of food crops, primarily fruits and vegetables, have also impacted consumer trust. Buying local isn’t just a trend.

The other piece of the puzzle is job creation, which is lacking in all sectors. When jobs are created, risk aversion is a very prominent factor in the hiring process and those hired are often screened to mirror, or at least be very similar to those already employed. That, in turn, fosters a lack of creativity and limits the disruptive thinking that might be gained through at least the debate on a fresh approach.

The result is that individuals who have the ability to lead new growth have opted for safer choices (http://online.wsj.com/article/SB10001424127887324031404578481162903760052.html) and are less likely to drive innovation, even within larger organizations.

Market research firms have followed suit and are further impacted by a fundamental and permanent shift toward interactive marketing. Past history has shown that simply doing nothing is not the answer. Even in modern day markets, the emanate demise of such iconic brands as Kodak and Sears should be a lesson learned. These companies were heavily invested in market research, and in the case of Kodak, were using interactive techniques, such as communities and mobile research far earlier than most organizations.

So what happened?

They failed to generate insights that created change within the organization. Because both organizations were largely dependent on internal sources for the development and management of their insights, they heard what they wanted to hear.

The problem for market research vendors is that for many years, they have largely stayed away from insight delivery because of the fear of losing the client. The very thing that would have given them an “all access card” was not delivered because of the industry’s risk adverse nature. Now it’s market research that’s shedding jobs. Some bright folks are trying to shift the market research business model from services to products. The problem with that is that research “products” are techniques that exist only as intellectual property and therefore only matter when there is a need for a specific market application.

So what’s the answer?

Take a chance. The value isn’t in the technique; it’s in the intellectual capital. If you know how to create a methodology, there has to be a corresponding set of answers that support the technique’s validity. If your organization can integrate those answers with an organizations data stream, you can deliver insights that foster innovation…and there is no limit to profitable growth for your organization and the organizations you support. Jobs will return with innovation and, in turn, so will consumer confidence. Be a part of the solution.

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8 Responses to “The Risk Aversion Paradox”

  1. joe underwood says:

    August 28th, 2013 at 9:14 am

    Ellen, you have so man points that are dead on that it is not even necessary to debate the few that I would challenge? You nailed the issue with your thread “disruptive thinking” surrounding a decision maker with “YES” internal thinking is going the way of Kodak, etc.

    joe underwood
    Area Code Shopper

    ps would you allow me to use your words as mine in one on one discussions with my peers?

  2. Ray Poynter says:

    August 28th, 2013 at 9:23 am

    Hi Ellen, a well thought through and interesting piece. However, I would like to explore two of the paradoxes a bit more. The first is difference between what is good for an economy and what is good for an individual. Most innovations fail, most entrepreneurs fail, so the logic for each individual entrepreneur is that they should not risk everything. However, the benefits to the economy of the few that succeed is massive – indeed, I think the number of entrepreneurs in the US is one of the keys to its success. However, research should not deceive. It should not tell people who are going to probably fail that they will succeed. It can help them minimise risks of failure, but in many cases these risk minimising strategies also limit the potential upside.

    The second paradox is the difference between what is best in the short term and what is best in the long term. In the short term, for most profitable companies, the best return this year comes from not changing anything. And, in a world of short-termism, and the latest share figures, this year’s performance can be massive. However, as you point out, companies that do not change fail in the long run (and the long run can come quite quickly as Kodak found out). One consequence of this paradox is that it is the failing companies that often adopt the most innovative and risk-taking approaches. For example, when P&G first appointed AG Lafley as their CEO they had just lost $85 billion of market capitalization – this gave Lafley the permission and the freedom to change P&G in fundamental way (as he recounts in his book The Game Changer).

    When I look at the issues surrounding insight, consultancy, and market research I am reminded of the old joke about “How many psychiatrists does it take to change a light bulb? One, but the light bulb has got to want to change!”. Can market research help foster innovation, change, and growth? Yes, but companies have to want to change. For example, if major clients were to decide to stop all the brand trackers, cust sat, NPS type projects on Jan 1st 2014, the research industry could have better, cheaper, more appropriate options in place. But, my prediction is that it will be the new companies who don’t know the old ways, and the failing companies who feel they have to roll the dice, who will change, with the bulk of the big spenders following some years behind.

  3. joe underwood says:

    August 28th, 2013 at 9:55 am

    Ray, good thread. Always have more than one arrow in your quiver……….Kodak only relied on one Arrow as did Circuit City and now even JCP (maybe).

    joe underwood
    Area Code Shoper
    Titan Fence, Inc.
    Woof Woof Roofs

  4. Ellen Woods says:

    August 28th, 2013 at 10:35 am

    Hi Joe and Ray:

    Thank you both for the kind words, and Joe use anything you like from the article. Ray, you make some valid points. I agree with most of you assertions and I think it comes down to the fact that disruptive change usually comes when there is little to lose. Doing nothing is sometimes a good thing as long as it is a re-grouping point. There are far more people and companies that prefer to follow than lead and so to your last point, I think it will be new companies that spur the changes and some older companies will follow and build on that change while some companies will simply disappear. Somebody has to see opportunity in order to become the lead dog. And as the old adage says, if you’re not the lead dog the view is always the same! I am working on a new post that underscores many of your points and ties these threads together nicely (I think).

  5. Why is research so risk averse? - NewMR says:

    August 30th, 2013 at 9:36 pm

    […] life as a response to Ellen Woods’ well thought out Greenbook post on the paradox of risk, which you can read here. However, here is an extended version of my thoughts on the difference between the herd and good […]

  6. edward04 says:

    September 2nd, 2013 at 10:56 am

    Nice piece. I agree with your diagnosis, not so sure about the therapeutic part. As Ray says, innovations mainly fail – whatever the category – so whilst part of a healthy future for Researchers is to become more truly and valuably embedded in the innovation processes, I’d suggest a different remedy. Researchers – and speaking as a Clientside researcher – have to clearly make the link themselves between an Insight and Revenue Potential. We have to work with numerous Departments, not just Marketing, become adept at influence, show our business understanding – and not allow others to take our insights and run with them. Success has many fathers….we need to ensure that we bask in the afterglow of things that work, manage the reputational value of our contribution. Research is an enabler, but too often we are perceived as a brake on moving forward.

  7. Ellen Woods says:

    September 2nd, 2013 at 11:03 am

    Hi Edward:

    I agree wholeheartedly with your assessment and hear similar comments from clients everyday. The ROI has become the key and marketing is no longer the master. My point was more in the carving of a business territory that leads to that ROI and cannot be transformed by another technology. It’s certainly not the total answer, but a part of the new value proposition for research. Research is no longer about collecting survey data and informing but rather about understanding and as you so eloquently put it – manage the reputational value of our contribution. It’s not what thing but really understanding the full eco-system better than anybody else. Thanks for the great thoughts!

  8. Why is research so risk averse? | NewMR says:

    October 7th, 2014 at 2:35 pm

    […] life as a response to Ellen Woods’ well thought out Greenbook post on the paradox of risk, which you can read here. However, here is an extended version of my thoughts on the difference between the herd and good […]

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