Yesterday morning we awoke to the sound of a car crash. Rushing out, we found that a car that had been speeding through the village had skidded and crashed into our garden fence, destroying around 20 metres of fencing and a street sign. Luckily, no one was hurt.
Back in the midst of time, when I was a Geography student, my Transport Geography professor, John Adams, had a theory of risk homeostasis. He believed that new car safety features – better tyres and brakes, crumple zones, airbags and seat belts etc. – simply serve to make drivers feel safer. But everyone has their own level of risk tolerance, and, according to Professor Adams’s theory, those with a higher appetite for risk respond to an increased sense of safety by acting more recklessly.
Unfortunately, given the extra safety features, Professor Adams’s research showed that while the accident rate for drivers and passengers in cars had fallen, the risk to pedestrians and cyclists had increased.
He proposed, instead, that while car passengers should be able to benefit from seat belts and airbags, the driver should have access to none of these features. Instead, he argued that there should be a large metal spike coming out from the steering wheel and pointing directly at the driver’s chest. Only then would drivers act with the appropriate level of care and consideration to others!
Unlike entrepreneurs, who need to balance the potential loss of their investment (often meaning the loss of their home) with the growth in the value of their business, highly paid salaried executives face no real downside risk. They either earn a lot of money or a huge amount and, if they fail completely, they are simply paid off or put on 12 months’ paid garden leave.
As a result, using the risk homeostasis theory, is there a danger that executives, particularly those with higher risk appetites, can act recklessly in pursuit of bonuses? Does that help explain, for instance, Boeing’s 737 Max crisis or even the 2008 financial crisis?
And, if that’s the case, how do you think we should best balance executive remuneration with effective governance to create an appropriate level and perception of risk for managerial CEOs and their fellow senior officers? What is the managerial equivalent of John Adams’s steering wheel spike?
Off The Record: Cars and Girls by Prefab Sprout
Little boy, got a hot rod,
Thinks it makes him some kind of new god,
Well, this is on race he won’t win.
‘Cause life’s no cruise with a cool chick,
Too many folks feeling car sick,
But it never pulls in.