Risk Tolerance and Business Ethics

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Table of Contents

Introduction
Main body
Conclusion
References

Introduction

Risk tolerance is a significant factor that influences business decisions in multiple ways. It is worth considering its impact from the point of view of business management and corporal ethics. Firstly, there are common pitfalls in determining risk tolerance that reflect basic critical thinking. It is necessary to discuss their essence and the extent of their effect. Secondly, it is important to explain how ethics in business decisions are influenced by the poor awareness of risk tolerance. Thirdly, it is theoretically and practically useful to know if the field of ethics, like other business spheres, involves uncertainty and risk tolerance.

Main body

First of all, the definition and essence of risk tolerance should be explained. It is the difference between expected and real return on investments. Consequently, if the company’s management risk too much, they might panic and start selling at an inappropriate time. In other words, according to Holzhauer, Lu, McLeod, and Wang (2016), risk tolerance is “ the extent to which a person chooses to risk experiencing a less favorable outcome for the chance of a more favorable outcome” (p. 430). It means that one should apply critical thinking to the situation, evaluate it soberly, and be objective in considering risks. This approach will help consider perspectives of a certain investment.

From this point of view, one can guess that there may be different degrees of critical thinking applied to risk tolerance. Researchers provide examples of people risking their investments and making various mistakes that prevent them from reaching success (Holzhauer et al., 2016). The first pitfall that one can see in how the mentioned people determine risk tolerance is basing the evaluation on initial risks but not on residual ones while it should be based on both. In this case, basic critical thinking is reflected in considering the former type of risks while it is not applied to evaluating the latter one.

Researchers point out that another common pitfall is when risk evaluation is not sufficient enough (Holzhauer et al., 2016). It means that some risk evaluation elements are overlooked. Here, the lack of basic critical thinking can be observed as some criteria are not considered at all.

Further on, any situation may change radically. The investor should be flexible and evaluate risks not only at the beginning of the operation but also during the whole period until he or she receives returns on investments (Holzhauer et al., 2016). However, it is a common pitfall that they overlook the necessity of making such constant evaluations and, as a result, suffer losses. In this case, basic critical thinking is reflected only in the first stage of determining risk tolerance. However, after that, it is not applied.

Examples show that there is one more common pitfall that can occur when evaluating risks (Holzhauer et al., 2016). It is concentrating on high ones while low and moderate ones are not considered at all. Overlooking the latter two, one can suffer significant losses, although he or she evaluated high risks correctly. In this case, critical thinking is reflected merely in high-risk evaluation.

To conclude this discussion, one should say that basic critical thinking should be applied to all aspects of determining risk tolerance. Only on this condition, risk evaluation may be objective and applicable. According to researchers, even if an investor achieves good results, it does not mean that a smart decision was made (Holzhauer et al., 2016). If it was immature or wrong, but the investor succeeds, it is even worse than a failure as it shows that the factors that determined the success had also been overlooked.

The next point of discussion is the influence of uncertainty and poor awareness of risk tolerance on corporal decisions. Firstly, it is necessary to explain what is ethics, especially in business. In general, it is a conception that consists of moral values that are used in relations with other people. Corporal ethics is a set of values used inside a company, especially in communication between the employer and employees. According to Grosser, Moon, and Nelson (2017), there are several causes of making unethical decisions by a manager, including conflict of interests.

A vivid example of conflict of interests is the disaster of the space shuttle Challenger. Lau, Tan, and Goh (2013) point out that seven people perished on that journey because they were not provided with any means of emergency escape. It means that those who were managing the flight sent it to space risking the passengers’ lives. Thus, one of the passengers’ interests was to survive, and the management sacrificed it to their one to fulfill the flight as planned. That approach caused seven deaths.

As for business, similar situations can also emerge. If the management makes a decision without considering risks on a sufficient basis, it may cause the enterprise to collapse. For example, a common pitfall in evaluating risks is overlooking evaluation criteria (Holzhauer et al., 2016). Thus, a company’s management, being poorly aware of determining risk tolerance, decides to put the whole enterprise at stake. One may assume that it is a thriving company with one or two hundred employees. The management’s wish is to gain super profit, and, due to their ignorance, they risk not only the property but also their workers’ employment and well-being. Respect for employees is a question of ethics.

This example and the case of Challenger (Lau et al., 2013) show that the dimension of ethics is not the same as other ones involving risk tolerance and uncertainty. Firstly, most aspects consider merely business objects, instruments, etc. while ethics deals with people and concerns relations between the employer and employees. Secondly, when people’s lives and interests are concerned, there can be no excuse for unbalanced decisions. Finally, human capital is more valuable than any other as individuals with concepts can make money while money without people’s ideas cannot create new capital. These are the reasons why ethics in business should be paid much attention to, and human resources should be highly valued.

Conclusion

In conclusion, it is necessary to say that, firstly, there are four common pitfalls in determining risk tolerance that reflect basic critical thinking. Namely, they are the following: taking into consideration only initial risks, insufficient evaluation of risks, not considering risks appearing during the whole period until receiving returns on investment, and concentrating on high risks while overlooking low and moderate ones. The second conclusion is that poor awareness of risk tolerance may lead to unethical decisions which will harm employees. The third conclusion is that ethics is a peculiar aspect of determining risk tolerance and is different from other ones as it concerns living humans but not capital.

References

Grosser, K., Moon, J., & Nelson, J. A. (2017). Gender, business ethics, and corporate social responsibility: Assessing and refocusing a conversation. Business Ethics Quarterly, 27(4), 541-567.

Holzhauer, H. M., Lu, X., McLeod, R., & Wang, J. (2016). RiskTRACK: The five-factor model for measuring risk tolerance. The Journal of Risk Finance, 17(4), 428-445.

Lau, S. W., Tan, T. P. L., & Goh, S. M. (2013). Teaching engineering ethics using BLOCKS games. Social and Engineering Ethics, 19, 1357-1373.

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Risk Tolerance and Business Ethics

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