Power and Decision Making

Most organizations and societies that we belong to are organized in a hierarchical fashion with some individuals having more power than others. A company’s CEO, for example, is typically more powerful than the company’s janitor, and a majority group is usually more powerful than a minority group. Furthermore, people regularly experience subjective feelings of being both powerful and powerless, regardless of their stand in the social hierarchy. Being asked for one’s expert advice may induce a psychological state of feeling powerful (even if one is not a CEO), whereas being evaluated by one’s peers may evoke a sense of powerlessness. The ubiquity of power in everyday life prompts an important question: do people decide differently when feeling powerful versus powerless? And in particular, does the experience of power influence risk taking in decision-making?

In some cases, under certain conditions, power can lead to conservative decision-making. However, in most cases, research shows that power tends to increase risk-taking. While this is not particularly surprising, a more interesting question is: why does power increase risk-taking? Understanding why power increases the propensity to make risky decisions is critical to developing effective behavioral modification strategies – for example, if we want to curb a powerful person’s risk tendencies.

There are at least three reasons why power increases risk-taking. 1) Power increases optimism in the perception of risk. When feeling powerful, people tend to overestimate the likelihood of success and underestimate the likelihood of failure. 2) Power reduces loss aversion. That is, a given loss is expected to be less painful when feeling powerful than otherwise. And 3) powerful individuals often make risky choices to signal their power to others.    

To illustrate the first reason, consider the following questions: What are the chances that your home will be broken into in the next six months? What are the odds that the investment opportunity you are considering will yield the desired return? The increased optimism idea suggests that when feeling powerful, people would estimate the odds of burglary to be lower and the chances of a successful investment to be higher, which could have a significant impact on the type of insurance coverage they might get or security system they might install, and whether they would go ahead with the investment decision.

Greater optimism explains the effect of power on risk-taking in many situations, but is not the only reason why power increases risk-taking. Sometimes the powerful make riskier choices not because they mis-estimate the likelihood of various outcomes, but because they are less concerned with the impact of negative outcomes.

To better understand this reduced loss aversion and how it differs from increased optimism, let’s look at a simple example. Suppose I offer you a coin gamble that would pay you $150 if the coin shows heads, but would cost you $100 if the coin shows tails. Would you accept to this gamble? In situations like this, people tend to be risk averse. This is because of something called loss aversion. For most people, the prospect of losing $100 is much more painful than the prospect of winning $150 is pleasurable. However, when people are made to feel powerful, they become more than twice as likely to accept the gamble than otherwise. But this increase in risk taking is not due to differences in the perceptions of risk. In fact when people are asked what they think the probabilities of winning and losing are, both the powerful and the powerless accurately assess the risks at fifty-fifty. When asked how much pleasure they would get from winning $150 and how much or pain they would get from losing $100, the powerful indicate that losing $100 would feel less painful.

A third reason why power can increase risk-taking is that people like being powerful, and they like to let others know about their power. One way to let others know about one’s power is to show them that one is not afraid to take risk. One important implication of power signalling is that powerful individuals should be more likely to choose a risky option when the choice is public than when it is private.  Indeed, there would be little point in signalling one’s power if there is no audience to signal to. Consider the following scenario:

Imagine that your company is suing a competitor for trademark infringement. Your company has made a claim for a large sum of money in damages. The trial is going well, and your company’s lawyer cites expert opinion that you have a 95% chance to win the case.

The competitor offers a settlement in which your company would get 90% of the claim. What would you advise the company to do?

Settle now and get 90% of the claim ____

Pursue the case (95% chance to get the entire claim, and 5% chance to get nothing) ____

The answer, it turns out, depends on people’s power and whether the decision is public or private. That is when respondents expected to discuss their decision with others, power led to a significant increase in risk-taking, but when respondents expected their decision to remain private, the effect of power was greatly reduced.  Other studies also found that the effect of power on risk taking diminishes when the need to signal power is low, for example, when the powerful are given an opportunity to signal their power prior to the focal decision, or when the powerful feel that others already acknowledge and accept their power.

In sum, we’ve explored three different reasons for why power tends to increase risk taking. These are: 1) power increases optimism in the perception of risk, 2) power reduces aversion to losses, and 3) powerful individuals may use risk to signal their power to others. These three “whys” often operate below the level of consciousness. That is, we are not always consciously aware of how or why our feelings of power influence our decisions. The three whys also have vastly different implications for the types of interventions needed to minimize the effect of power on decision-making. The first two require a more objective assessment of the possible decision outcomes, in terms of their likelihood and the costs and benefits associated with them, whereas the third why requires either reducing the need to signal power or the implementation of decision frameworks designed to guard against overt displays of power.

Next time you find yourself feeling powerful and are about to make a risky decision, take a breath and ask yourself these questions:

Am I being overly optimistic? Have I considered all the available information when assessing risks?

Have I valued the costs and benefits associated with all the possible outcomes objectively?

Am I only choosing the risky option to signal my power?

It is important to note that the intention is not to promote conservative decision making at all time. In fact, a healthy dose of risk-taking is often necessary to achieve success. But by reflecting on these questions, you bring to the surface some of the unconscious processes that might influence your decision. You will have a better understanding of why you are prepared to make a risky decision and whether it is justified.  

Haskayne Executive Education's Effective Decision Making program run February 2 and 23, 2017. Register now to build your decision making ability.

About the author:
Mehdi Mourali, PhD 
Mehdi is an associate professor of marketing at the Haskayne School of Business. His work focuses on understanding how people make judgments and decisions in the marketplace. In particular, his work investigates how psychological factors, such as motivation and affect, interact with environmental factors, such as the social and physical contexts, to influence consumer judgment and decision-making.