Does Birth Order Affect a Leader's Propensity to Take Risks?

Source: Psychology Today

In our own families, we probably have all talked anecdotally about the differences in behavior and personality among our children and perhaps attributed some of those differences to birth order.  Researchers, of course, have been studying birth order effects for some time.   This year, Robert Campbell, Seung-Hwan Jeong, and Scott Graffin have published a study on CEO birth order.  They examined whether birth order affected a CEO's propensity to take risk.   Campbell and his co-authors write: 

We theorize that CEO birth order is positively associated with strategic risk taking; that is, earlier-born CEOs will take less risk than later-born CEOs. As evolutionary theory proposes that birth order effects are driven by sibling rivalry, we also argue that this relationship is moderated by three factors related to sibling rivalry: age gap between a CEO and the closest born sibling, CEO age, and the presence of a sibling CEO. Our results provide support for our theorizing and suggest that birth order may have important implications for organizations.

I found this result quite interesting and somewhat intuitive.  However, I then ran across a different study that reviewed many studies of different types that looked at birth order's impact on adult risk taking generally (not exclusive to CEOs or business).  Tomás Lejarraga, Renato Frey, Daniel D. Schnitzlein, and Ralph Hertwig published this analysis in the Proceedings of the National Academy of Sciences in March 2019.   Here is what they conclude: 

Does birth order shape people’s propensity to take risks? For decades, personality psychologists have believed that birth order influences personality, but recent evidence has accumulated to indicate that this is not the case. The effect of birth order on risk taking is less clear. We searched for evidence in survey, experimental, and real-world data, analyzing self-reports, incentivized risky decisions, and consequential life choices. The findings point unanimously in the same direction: We found no birth-order effects on risk taking in adulthood.

What do I make of these conflicting results?   Honestly, I'm not quite sure.   Are CEOs somehow different than typical adults?  (Surely they are!) Does sibling rivalry play a major role in CEO's lives, perhaps more so than in other's lives?  That's plausible.  More study needs to be done on this matter, as we clearly don't have a full picture.  

I do think it's interesting to try to understand what might shape an executive's propensity to take risk though. For instance, Matthew Cain and Stephen B. McKeon looked at chief executives who had pilot licenses. Flying small planes is viewed as thrill-seeking behavior. Professors Cain and McKeon found that chief executives with pilot licenses were more prone to engage in acquisitions, with the theory that takeovers are risky, yet exciting ventures.   Should Boards think about a person's propensity for taking risks when hiring a chief executive?  Certainly.   They have to recognize when a person might be incredibly risk averse or risk-seeking, and how their attitudes may or may not fit the needs and circumstances of the organization at that time.  They also need to understand the type of questions that they should be asking about risky choices, and the type of monitoring and control in which they should engage.  

Do Materialistic CEOs Take More Risk?

Professors Robert Bushman, Robert Davidson, Aiyesha Dey, and Abbie Smith have written a fascinating paper titled, “Bank CEO Materialism: Risk Controls, Culture and Tail Risk.” They actually measured how materialistic bank CEOs were, and they examined the impact that the CEO's personal value system might have on the risk culture of the banks that they led. 

Their sample included 284 firms and 445 CEOs during the 1992-2013 time period.   They examined personal ownership of luxury goods as a proxy for the "materialistic" nature of a bank CEO.    They labeled CEOs as materialistic if they owned an automobile that cost more than $75K, a boat longer than 25 feet, or a home worth more than twice the median price of homes near their company's headquarters.  They also ran their analysis using higher cut-offs for each of these luxury goods (for example, they raised the purchase price of cars to $110,000).   Then, the researchers also examined the banks' risk management cultures.  They did so by collecting data on the risk management index of each bank.  This index draws on data from reports that the banks file with the Federal Reserve each year, and it strives to evaluate the "strength and independence of the risk management function" at each institution.  

What did they find?  The scholars report, "Using an index reflecting the strength of risk management functions (RMI), we find that RMI is significantly lower for banks with materialistic CEOs, and that RMI significantly decreases after a materialistic CEO succeeds a non-materialistic one and increases after a non-materialistic CEO replaces a materialistic CEO."  

Finally, the scholars report an increase in the number of materialistic CEOs over the years.  I find the study very interesting, both because of the findings and the great care that the scholars took to try to measure key variables.  We all might believe intuitively that value systems matter, but this study actually shows a relationship between a leader's values and the behavior of the organization that he or she leads.  Naturally, these scholars are not saying that buying a big house or a large boat is inherently bad.   However, they are suggesting that we should pay attention to actions and decisions that may reveal a leader's value system.   Their personal purchasing decisions are one piece of a larger picture, and we should pay attention to all the cues available to us.  In the end, it doesn't mean we should reject a leader who may display signs of being materialistic...but we should be a bit more vigilant about the impact that the leader may have on the organization's culture.  

Competitive Rivalry Increases Risk-Taking Behavior

Intuitively, many of us probably believe that heated competition with a rival increases our propensity to take risks.   That type of behavior occurs in sports, at school, and in the business world as well.   Several scholars chose to examine whether the data support this conventional wisdom.  Here is what they found, as summarized in this NYU Stern Research Highlight:

In this first-of-its-kind study, the authors (NYU Stern PhD student Christopher To , NYU Professor Gavin Kilduff, University of Arizona Professor Lisa Ordóñez, and Wharton Professor Maurice Schweitzer) examined archival data from more than 2,000 regular season NFL games, totaling almost 500,000 unique plays, and found that teams, when competing against a rival team, were 37% more likely to forgo kicking an extra point to instead attempt a two-point conversion and 17% more likely to “go for it” on fourth-down by running a play instead of punting or attempting a field goal. A related behavioral study with more than 140 University of Arizona students confirmed their results and showed perceived rivals took 17% more risks than non-rivals, which was partly explained by a 11% greater increase in their heart rate.

As a New England Patriots fan, I immediately think of Bill Belichick's ill-fated decision to go for it on Fourth and 2 yards to go from the Patriots' own 28 yard line against the Colts in 2009.  In fact, the legendary coach has made some of his riskiest decisions against heated rivals in big games.  Belichick didn't have much confidence that his defense could stop Peyton Manning on that night in 2009.  Manning and the Colts, of course, were huge rivals of the Patriots in those years.   The coach made a very risky decision, hoping to keep the ball and run out the clock rather than give Manning another opportunity on offense.  It didn't work. The Patriots did not make a first down, and Manning promptly marched the Colts into the endzone for the victory.    Sometimes, rivalry might indeed cause us to make ill-fated risky choices.  You make a bold decision, and if it doesn't work, you take a great deal of heat.  That's what happened to Belichick on that night.  I'm not sure it was a bad decision actually, but it certainly was highly risky. 

On the other hand, sometimes heated rivalries can cause us to take innovative risks.   Not all risk-taking is bad. Sometimes, it involves creative choices spurred by competitive rivalry.   Consider another very famous Belichick decision.  In 2003, the Patriots trailed the Denver Broncos (another key rival) by 1 point with just over 3 minutes left in the game.  The Patriots faced a fourth down and ten yards to go from their own 1 yard line.  A punt from there would be difficult to execute, and it would probably give the Broncos the ball with tremendous field position.  Instead, Belichick made the very bold decision to take a safety intentionally, causing the Patriots to fall further behind (26-23 at that point).  However, the Patriots could now kick off from the 20 yard line, and a good kick sent the Broncos all the way back to their own 15 yard line.  The Patriots defense stopped them in three downs, received the ball back with decent field position, and then Brady worked his usual magic.  A short time later, he threw a touchdown pass to David Givens to win the game.   In this case, competitive rivalry may have led to innovation, to a beneficial form of risk-taking behavior.  

In sum, the study confirms that competitive rivalry increases our propensity to take risk. However, the scholars make an important point.  Such behavior may not always be detrimental to the organization.  Sometimes, rivalry sparks innovation.  

Do Unmarried CEOs Take More Risk?

Wharton Professor Nikolai Roussanov and Temple Professor Pavel Savor have written a new paper titled “Status, Marriage and Managers’ Attitudes to Risk.” They examined the question:  Do unmarried CEOs take more risk in their business decisions than married CEOs?   Here's an excerpt from Knowledge@Wharton, in which Roussanov describes the findings from this research:  

We looked at … the risk-taking decisions of CEOs of public companies in the U.S. We collected data [about the] marital status of CEOs of the 1,500 largest public companies and looked at the differences in behavior of these firms — of the firms that were led by CEOs who were single and those who were married... What we found was that firms led by single CEOs engaged in much more aggressive investment behavior, along the lines of capital expenditures, as well as innovation activity, research and development, and acquisitions to some extent, than companies led by CEOs who were married. These differences translated also into greater riskiness of the firms led by single CEOs as measured by the stock return volatility.

The findings are rather interesting, and the scholars intend to extend this research in the future.  What's the next stream of research for them?  Roussanov reports that he would like to examine how marital status affects the decisions of money managers.  We look forward to seeing those findings.

Another Major Downside to Large CEO Severance Packages

According to the Wall Street Journal, Tulane Professor of Finance Peggy Huang has conducted a terrific new study regarding CEO severance packages.  As you know, many journalists, investors, and analysts have expressed dismay at some of the large severance packages provided to dismissed CEOs in recent years.  Huang set out to examine the impact of such packages in more detail.   She explored whether such packages may have led to excessive risk-taking (since the cost of failure was substantially reduced by the generous severance).  More specifically, she examined whether companies whose CEOs had such packages underperformed the stock market during the CEO's tenure. 

Her findings suggest that Boards of Directors should proceed with caution when offering such packages, particularly cash-heavy packages.  Huang examined roughly 2,000 CEO severance agreements from S&P 500 companies between 1993 and 2007.  She discovered that these firms underperformed the market by 1.6% on average over a three-year period, when compared with firms that did not have CEO severance packages.  If the CEO had a cash-only severance package, the firms underperformed the market by 4% on average.  Looking at the CEO's actions in more detail, she found some evidence suggesting enhanced risk-taking by the CEOs with severance packages. 

Professor Huang offered a comment to the Wall Street Journal about her findings:  "With a severance contract, a company is basically saying that even if a CEO fails, there will be no penalty."

The Heroic Failure Trophy

The Wall Street Journal has a terrific article today about Grey New York, an advertising agency.   The firm's leader, Tor Myhren, has created a quarterly "Heroic Failure" award to encourage innovative risk-taking.   It reminded me of the Build-A-Bear award program that I wrote about several years ago.    Here is an excerpt from what I wrote about the Build-A-Bear "Red Pencil" award program. 


[Build-A-Bear CEO Maxine] Clark has built an incredibly successful company, growing it to over $350 million in sales over the past decade. She has done so by delivering a world-class customer experience in her stores. Clark credits her store associates, who constantly find ways to innovate and improve. How do the associates do it? For starters, they tend not to fear admitting a mistake or surfacing a problem. Clark’s attitude toward mistakes explains her associates’ behavior. She does not punish people for making an error or bringing a problem to light; she encourages it.

Clark credits her first grade teacher, Mrs. Grace, for instilling this attitude toward mistakes in her long ago. As many elementary school teachers do, Mrs. Grace graded papers using a red pencil. However, unlike most of her colleagues, Mrs. Grace gave out a rather unorthodox award at the end of each week. She awarded a red pencil prize to the student who had made the most mistakes! Why? Mrs. Grace wanted her students engaged in the class discussion, trying to answer every question - no matter how challenging. As Clark writes, "She didn't want the fear of being wrong to keep us from taking chances. Her only rule was that we couldn't be rewarded for making the same mistake twice."  

Clark has applied her first grade teacher's approach at Build-a-Bear by creating a Red Pencil Award. She gives this prize to people who have made a mistake, but who have discovered a better way of doing business as a result of reflecting upon and learning from that mistake. Clark has it right when she says that managers should encourage their people to "experiment freely, and view every so-called mistake as one step closer to getting things just right." Of course, her first grade teacher had it right as well when she stressed that people would be held accountable if they made the same mistake repeatedly. Failing to learn constitutes the bad behavior that managers should deem unacceptable. Clark makes that point clear to her associates.

Excerpt from Michael A. Roberto, Know What You Don't Know, Wharton School Publishing, 2009.  

Quotes are from Maxine Clark's book, The bear necessities of business: Building acompany with heart.  John Wiley and Sons.  2006.