A lot is talked about how important risk taking is in business, but not enough is understood about the nature and psychology of risk taking. Here's where the Peltzmann effect comes into play.

In a few words, the Peltzman effect can be simply be stated this way: when people are regulated, they are more likely to engage in risky behaviour to compensate for the regulation. This effect is named after Sam Peltzman, an economics professor at the University of Chicago Booth School of Business. In 1975 he published "The Effectis of Automobile Safety Regulation", in which he discussed the reason why highway deaths had not decreased in spite of seat belt regulations. Although seat belts are an added safety feature, this in fact makes people feel more safe and more in control and thus engage in more dangerous behaviours.

People try to regulate the risk they face based on the circumstances they find themselves in. If they find themselves in risky situations, they will act in a less dangerous manner in order to decrease the possibility that something "bad" will happen.

Risk homeostasis

While Peltzman talked about risk compensation from an economic standpoint, Gerald J.S. Wilde, a professor from Queen's University in Kingston, Ontario, looked at risk compensation from a psychological point of view.

Wilde stated that risk is an inherent part of our psychology, and that each of us needs a certain amount of risk. He hypothesized that each individual has their own target level of risk - an individual "risk thermostat". The behaviours we engage in will thus depend on our perceived target level of risk. If the level exceeds our target, we will try to reduce it down to our target through safer actions. If the levels falls below our target, we will try to bring it back up by engaging in more dangerous actions. And perhaps Wilde said it best when he extended this beyond the use of seat belts:

"Risk homeostasis may thus apply not only to road use, but also to industrial safety, sports, making love, smoking, drinking, doing home repairs, climbing ladders, physical exercise, investing money, gambling, and who knows how many other activities”

So what does this have to do with your business?

As a business owner, your only comfort level should be pushing the limits. Your limits, and your team's limits.

Because what is taking risks anyway? As Richard Branson says , it's simply "trying things that might not work, and then improvising along the way."

If you don't try things that might not work, you will never come up with innovative solutions that haven't been applied before. You will be following others' solutions.

You are probably well aware of your own level of risk. You know what you are comfortable with and where you're reaching your limits. But how comfortable are you exceeding your own target level of risk?

One of the most interesting quotes about risk taking belongs to Gary Kasparov:

 "If you don't take risks, you don't drink champagne."

If it serves you, you can turn it around to say: "If you don't take risks, your business doesn't drink champagne."

If you want to be able to lead a team that takes risks, it's imperative to evaluate your own level of risk, and understand what holds you back from taking calculated risks. Chances are, if you're not taking risks, you are missing out on a lot of opportunities.

Nurturing a team of risk takers

While you as the leader might be inclined to take risks on behalf of your business, you shouldn't absolve your team from risk taking. As an entrepreneur, you're probably already less risk averse than the general population. But how about your team? Are you leading a team that takes risks?

It's very easy for your team members to become more and more complacent with their everyday positions when they know that's what garners positive feedback. But you want your team to grow as your business grows, and calculated risks are necessary not only for you, but also for your team members.

"A comfort zone is a beautiful place, but nothing ever grows there." (Anonymous)

When it comes to taking risks, several emotions might be at play, depending on your team members' past experiences. Some of them might feel stress and anxiety caused by a fear of failure. That's why it's important that you lead by example, showing them that going out on a limb is desirable and helps move forward your company.

Risk taking is an essential part of a thriving business. Without risk taking, progress stagnates and ingenuity comes to an end. You can motivate your team by removing sources of anxiety from the workplace, and encouraging your team to take chances without fear of failure.


How much of a risk-taker are you? How about your team? Share your experience with us in the comment section below.