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The Journal of Risk Finance
Risk management and managerial mindset

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Risk management and Risk

management
managerial mindset and managerial
mindset
Ronald William Eastburn
Department of Management, University of South Alabama, Mobile,

Alabama, USA, and 21
Alex Sharland Received 6 September 2016
University of South Alabama, Mobile, Alabama, USA Revised 16 November 2016
Accepted 21 November 2016
Abstract
Purpose – This paper aims to determine why so many banks do not recognize in a timely manner the
inherent risks and imbalances with their risk/reward decision trade-offs, to elevate the risk conversation by
embracing a more strategic and adaptive behavioral perspective and to show how an effective risk
management organizational mindset is a definite solution for mitigating risk.
Design/methodology/approach – A direct-mail questionnaire survey was designed with the unit of
analysis US community bank (under US$1.5bn in assets) and its risk performance. We used quantitative
methods using previously tested scales for main constructs and FDIC bank data for performance measures. To
gauge the models capacity for determining discriminatory value, results were also measured against relative
peer financial performance.
Findings – The findings established that an effective risk management process that assimilates risk
tolerance, risk propensity and risk practices into a managerial mindset offers a sound solution for mitigating
risk. By envisioning risk as a “conceptual model of thinking” and interpreting it as a “predictable business
process”, and by offering specific “decision enablers” that complement the corporate mindset, it creates a
safety net against unsafe risk practices. As a result, it allows for an appreciation that current financial
performance is a direct measure of management’s risk decision capabilities.
Research limitations/implications – The sample size (n ⫽ 151), although adequate for our purpose
was relatively small, was restricted to US community banks (less than US$1.5bn in assets) and
single-informants (CEOs), thereby providing a somewhat narrow focus. Also, the survey was conducted
during a slow economic period, and results may be different during a growth period. We see ripe opportunity
for further research, especially related to money-center and regional banks and the next level of management
as well as the behavioral influences that frame the risk/reward opportunity. Research on other industries,
small businesses, etc., would be valuable because risk permeates all decisioning.
Practical implications – From a practitioner perspective, providing guidance on risk oversight allows
for improved financial performance. The findings should be of interest to financial industry leaders, policy
makers and regulators as understanding how an active orientation of risk tolerance, risk propensity and risk
practices are coordinated across the organization is vital. Also, managers need to understand how
characteristics of risk management manifest itself within their organization in terms of productivity and
financial performance.
Originality/value – This paper is the first comprehensive empirical study that incorporates a conceptual
approach that uses outcome history, behavioral influences and operational dimensions to identify risk
management capabilities in community banks designed to increase risk/reward awareness.
Keywords Risk governance, Decision framing, Banking, Behavioral risk, Managerial mindset
Paper type Research paper
1. Introduction The Journal of Risk Finance

Vol. 18 No. 1, 2017
Mitigating risk has always been a primary concern for US commercial banking and has pp. 21-47
taken on greater meaning following the global 2007-2009 Financial Crisis, which exposed © Emerald Publishing Limited
1526-5943
extensive failings in risk governance practices (The Financial Crisis Inquiry Report, 2011). DOI 10.1108/JRF-09-2016-0114
JRF Identifying, measuring and analyzing risk is what bankers are supposed to do best. Yet, the
18,1 results achieved are far from consistent, and as such, it is seen as a mandate for securing a
clearer appreciation of the dynamic forces underlying sound risk mitigation practices.
Given the longevity and prominence of the banking industry, it is rather surprising that
research continues to emphasize the need for developing a more integrated and
comprehensive view of risk management (Nocco and Stulz, 2006; Sabato, 2010) and the role
22 that can be played by enhanced risk governance mechanisms (Aebi et al., 2012; Diamond and
Rajan, 2009). Furthermore, there continues to be an ongoing debate about whether
appropriate regulations are in place to monitor bank risk taking (Gaul and Pavlia, 2013), and
more importantly, it has prompted a call for all banks to be “better be prepared to face the
next crisis” (Aebi et al., 2012, p. 3225) and has reinforced the domain of risk governance and
risk management as being fundamental and vital components for banking success.
Under this daunting setting and given the vital role risk plays in defining financial
performance, there exists a need to identify the shortcomings within a bank’s risk operating
framework. The underlying premise of this research is that banks do not consciously set
about to hamper their success by suffering from the negative consequences of their decisions,
in other words, “no one takes a risk in the expectation that it will fail” (Bernstein, 1998, p. 12).
Therefore, dimensioning risks in terms of a bank’s mindset requires management to be
mindful of any potential vulnerabilities and to be cognizant of the potential for misjudging
those intrinsic risks within their decisioning. This responsibility is highly dependent on
management’s understanding of their risk-taking motivations and appreciation for
uncertainty that is visible in their institutional framework adopted for managing risk.
Bowman (1980) raised the need for developing theory about risk within the strategic
management discipline and pushed risk beyond performance analytics to the intuitive
capabilities of management to raise risk-taking as a distinct decision process in
organizations. McNamara and Bromiley (1999) argued for a more careful understanding of
managerial definitions of risk and return and for greater understanding of risky decisions at
an organizational and market setting. Palmer and Wiseman (1999) added to the discussion
and showed that both managerial and organizational factors promote risk taking, with the
impact on risk primarily channeled through managerial choices. Fahlenbrach et al. (2012)
showed how financial risk-taking is shaped by a “risk-culture” and that this culture is
present in all managerial decisions. Yet, our knowledge remains rather limited, especially
when it comes to understanding management’s resolve for taking greater (or lesser) risks in
optimizing performance. The purpose of this study therefore was to gain insight into this risk
mitigation mindset to advance a more strategic and adaptive behavioral perspective toward
optimizing risk/reward opportunities, as well as contribute to the continuing debate on risk.
Community banking institutions (those commercial banks under US$1.5bn in assets)
were chosen for this analysis because they are charged (by regulation and the market) with
ensuring safety and soundness of their institution. On an individual bank basis, failure to
perform reliably can obviously have serious implications, even bankruptcy, but when
unreliability occurs on a macro-scale, we see the potential for catastrophic consequences, as
was made evident by the Financial Crisis of 2007-2009. The underlying intent of this study
therefore was to determine why many banks do not recognize in a timely manner the inherent
risks that result in unfavorable outcomes.
The research report that follows is organized into four sections. First, a literature review
pertinent to the theoretical aspects of risk is provided. Next, an interpretative quantitative
study of 151 US community banking executives’ evaluation of their bank’s risk operating
mindset and risk control process is covered. Third, the findings are discussed, conclusions
are drawn and guidance provided to reduce unwarranted risk occurrences. Finally, research Risk
limitations and suggestions for future research opportunities are provided. management
and managerial
2. Theoretical support for the model mindset
2.1 Business risk pervasiveness
Dimensioning risks in terms of potential losses requires firms to be mindful of any potential
uncertainties bounding their future performance. Deviations from expectations can 23

potentially surface from many sources – from strategic resource commitments, generic
investments or from poor strategic positioning or as Starbuck and Hedberg (1977) showed:
managerial inertia or organizational stagnation. It can also come from an inability to read
and act on signals of environmental change (Reeves and Deimler, 2011) or from the moral
hazard risks posed by institutions that have become “too big to fail” as the financial crisis
highlighted (Maguire, 2009). Risk can also stem from agency problems between management
and shareholders and ownership structure (Saunders et al., 1990), as well as risk preferences
and regulatory actions (Buser et al., 1981), from decision-making (Adner and Levinthal,
2004), strategic change (Greve, 1998), strategic diversification (Montgomery and Singh,
1984), innovation (Bowman, 1980; Cyert and March, 1963) and in reducing downside
exposures (Meulbroek, 2002) and the like. As a direct result of risks’ pervasiveness, the
challenge set for management is in contemplating what risks are prevalent and in lessening
their downside implications.
2.2 Bank risk-taking

Risk research has emphasized its direct effects with competition and risk taking (Boyd and
DeNicolo, 2005); CEO incentives and bank risk (Acrey et al., 2011); operations and risk (Kulpa
and Magdon, 2012); capital regulation and risk (Kim and Santomero, 1988); and how, for
example, low interest rate environments trigger the search for higher yield and elevate risk
(Delis and Kouretas, 2011) or when banks believe they are too big to fail (Alfonso et al., 2014).
Also, research has adopted a silo approach with analysis conducted for example on liquidity
risk (Cornett et al., 2011) and market risk (Ashcraft, 2008) and also in relation to banks’
service innovation (Gianiodis et al., 2014), operational risk (Jarrow, 2008), reputation risk
(Xifra and Ordeix, 2009) and performance effects (Andersen, 2008) to name just a few,
thereby confirming the pervasiveness of risk and how it festers as a detrimental force to bank
performance.
Research has also been applied in various empirical settings to validate the effect on bank
performance. For example, it was studied in relation to managing risk in Middle-East banks
by Al-Tamimi and Al-Mazrooei (2007), where they found that UAE banks are “somewhat”
efficient in managing risks. McConnell’s (2009, p. 172) analysis of a large foreign bank having
suffered major losses concluded: “the bank should not have operated in an environment
where all the risks were not fully understood and managed”. Ellul and Yerramilli (2013)
analyzed 74 large US banks using their risk management index and showed those banks
with less risk exposure performed better during the 2007-2009 financial crisis period.
Bowman (1982, p. 19) raised the risk/return paradox and confirmed that “higher-average
profit companies tended to have lower risk (i.e. variance over time)” when he observed a
negative relationship between traditional risk (i.e. simple variance) and average return
across 45 banks. As banks are in the business of managing risk and want the “best risk/
reward combinations” (Brown, 2004, p. 68), underlying their performance (regardless of size
of institution) is the continual and effective management of risk. In essence, it is a managerial
responsibility. This was reinforced in a Federal Reserve Bank of Chicago (1998) study of 162
US national bank failures, where the authors concluded that while economic problems
JRF clearly have an effect on banks, it is the management that lays the groundwork for how
18,1 serious the effect will be (Krause et al., 1998).
Obviously, banks must be adept in controlling their risk appetite. This willingness to take
on risk is reliant on maximizing control over uncertain outcomes by balancing risk and
return with sufficient accuracy and confidence so as to capture best risk/reward
combinations. How they do this can be explained by their proficiency in controlling risk
24 through self-imposed constraints, for there is an opportunity for failure existing within every
endeavor. If these constraints are not adequately controlled the organizing principle converts
to excessive risk taking, which is a key factor that leads to bank failure (Sharma et al., 2010,
p. 105).
2.3 Risk control

Sitkin and Weingart (1995, p. 1575) define the propensity for risk taking simply as a “current
tendency to take or avoid risks” which implies the seeking of an appropriate balance between
the risks being taken with the desired outcome. Decision theory suggests risk-seeking
behavior should provide a higher return or a risk premium (Bowman, 1980; Bromiley, 1991;
Fiegenbaum and Thomas, 1988; Miller and Leiblein, 1996). This logic implies that outcomes
are somewhat controllable to an acceptable expected return, but this is contrary to other
expectations where in some situations “more conservative risk approaches can actually
provide higher returns” (McNamara and Bromiley, 1999, p. 333). Yet at the same time, we are
also reminded that risk aversion when too strong (i.e. overly conservative) can
counterbalance profit maximization. Hence, it is not a question of risk elimination, rather it is
ensuring that the tolerance for risk taking is within manageable levels (Kaplan and Mikes,
2012).
2.4 Risk behavioral influences

Behavioral finance theory provides powerful tools for analyzing the complexity of risk
taking. First, we have Prospect Theory (Kahneman and Tversky, 1979) where we discern
that people are risk averse when facing gains but risk-prone when facing losses. Second,
“threat-rigidity” (Staw et al., 1981) constrains action in the face of threats, which is consistent
with conservative behavior. Third, people are disproportionally averse to large regrets
(Loomes and Sugdin, 1982; Bell, 1982). Fourth, risk tolerance has a strong relation to risk
aversion (Fiegenbaum and Thomas, 1988) and ambiguity where taking risk is better on
known rather than unknown probabilities (MacCrimmon et al., 1986). Fifth, people tend to
associate greater risk with negative outcomes (Levitt and March, 1988). In sum, the various
choices available in interpreting risk actions are highly dependent on the decision makers’
viewpoint (or judgment) of the potential risk outcome.
2.5 Risk-taking disposition

MacCrimmon et al. (1986) suggest a “willingness to take risks” is indicative of a relative
disposition toward taking risks. Implicit in this willingness is the way risk preferences and
risk-taking behavior can change with the framing of problems (Kuhberger, 1998; Kahneman
and Tversky, 1979; Tversky and Kahneman, 1981; Sitkin and Weingart, 1995), which is
extensively applied to understand firm-level risk choices (Audia et al., 2000). As framing
provides focus (Nutt, 1998), considerable influence on decision success can be attributed to
supportive-claims (Lyles, 1981). For instance, Bromiley (1991) found that results of previous
strategic choices (using past and current performance) influenced risk taking through its
effect as a reference point. May (1995) found evidence consistent with the hypothesis that
managers consider personal risk when formulating their decisions. Also, narrow framing
has been shown to promote inappropriate decisions (Dean and Sharfman, 1996). Thus, risk
choice is highly dependent on the way the problem is framed and one’s ability to make sense Risk
of the situation (Daft and Weick, 1984), as well as understanding the underlying beliefs and management
comfort level one has with risk-taking. Fitting decision maker behavior to expected outcomes
requires the realization of a sense of confidence (or doubt) about attaining desired goals
and managerial
(Carver and Scheier, 1998). By calling attention to important domain criteria (in our case mindset
relative regulatory and performance criteria) and the managers’ normative reaction to risk
and risk taking (personality biases), we reveal the distinctive shaping of bank risk
formulation. A brief explanation of the criteria is discussed below. 25
2.5.1 Regulatory criteria. The US Government’s role in protecting the financial system
and safety of depositor funds has paved the way for the establishment of a regulatory
safety-net which includes managerial oversight and indirect restraints on bank risk taking
activity. They impose capital restrictions (e.g. Tier1 risk-based requirements) on banks to
offset the “moral-hazard” problem. When bank capital levels are low, it can lead these banks
to increase asset risk (the opposite of prudent bank practices), as they have little to lose and
significant upside gains (especially to shareholders). Similarly, with deposit insurance
backing, it can drive banks to shift into high-risk assets or just raise their loan assets relative
to deposit funding, and as such they have transferred their liability risk onto the government.
To avoid abuses of this government protection, the cost to banks for access to this safety net
is supposed to remove the incentive to bear greater risk.
2.5.2 Relative performance criteria. Banks, by default and perhaps by moral suasion,
mimic strategies used by other banks. In doing so, they become recognized as more reliable
than a bank that deviates from this behavioral norm (Deephouse, 1996). As a consequence, if
a bank’s relative financial performance is weaker than peers, it would likely promote asset
reallocation toward higher risk instruments. In contrast, if a bank’s relative performance is
stronger than peers, it would possibly promote asset reallocation toward lower risk.
2.5.3 Relative asset size. The size of the institution is likely to have an influence, as it is the
basis of risk/reward status. It was included because larger firms should benefit from
economies of scale and scope (Cockburn and Henderson, 1994) and the ability to invest more
in exploratory activities (Cyert and March, 1963). Despite this benefit, it could be argued that
they are less nimble and less likely to undertake change (Aldrich, 1979) due to established
routines and hierarchical structures, and therefore be more subject to inertia effects
(Hambrick and Finkelstein, 1987). However, on the whole, we contend that firm size adds to
the framing on risky decisions, providing larger firms with the ability to promote asset
reallocation toward higher risk, as they have scale to better cover losses.
2.6 Management’s personal decision capabilities

Shaping decision choices depends not only on gathering business intelligence but also upon
the decision makers’ unique personal capabilities and is considered a reflection of
management’s emotional thinking process (Boyatzis and McKee, 2005). This process
“focuses attention on what is important” (McKenzie et al., 2009, p. 213), on the decision
makers’ attitudes toward risk (Guerron-Quuintana, 2012) and by their cognitive flexibility
(Spiro et al., 1987). The ability to make sense of the relevant information therefore is limited
by the decision makers’ mental schema, which can be influenced by their unique behavioral
traits and by performance restraints that frames the problem space. Thus, practical
limitations of managerial capacities can shape risk choices.
To this end, researchers have noted that CEO personality types play a vital role in
defining an organization (Miller and Toulouse, 1986) and in developing firm strategy and
structure (Miller et al., 1982; as well as being powerful aspects of human motivation. It was
with these considerations in mind that we sought to understand those motivational enablers
JRF that frame the risk space and are traits of individual personality. As a result, we opted for
18,1 optimism, mindfulness and curiosity as representative behavioral factors. These are
considered influential for the risk decision process, as they support perceptions of “future
outcomes” and are reflections of a measure of uncertainty.
2.6.1 Optimism. Optimists hold positive expectancies and are more confident about their
future, whereas pessimists hold negative expectations (doubts) and are less confident about
26 the future (Scheier et al., 1994). However, overconfidence can be a distinct inhibitor when
making decisions. For example, banker overconfidence steered the bureaucratic mechanical
risk management models during the recent financial crisis (Honohan, 2008). It has also been
shown to cause knowledge over-estimation (Fischhoff et al., 1977) and an inability to predict
outcomes resulting from difficulty in imagining how events can unfold (Tversky and
Kahneman, 1973). Ben-David et al. (2007) showed that high levels of optimism about the
future was correlated with strong prior performance which in turn produced a complacency
effect, thereby hampering future decision choices. Accordingly, when decision situations
rely upon “optimistic overconfidence” (Kahneman and Tversky, 1995), there is a tendency to
underestimate the inherent risk and actually enact more risk taking (Sitkin and Pablo, 1992).
2.6.2 Mindfulness. Mindful managers operate within a state of alertness, and an implicit
awareness of multiple perspectives (Langer, 1989a, 1989b). Being actively engaged in
seeking greater awareness of the present (Kashdan et al., 2009) and noticing differences,
nuances, discrepancies and outliers that would otherwise pass unnoticed (Weick and
Sutcliffe, 2006) is critical for future decision outcomes. It follows, that more mindful
managers should make decisions with fewer unexpected outcomes. However, being overly
concerned with insufficient knowledge to make a decision can get in the way of making
decisions.
2.6.3 Curiosity. Curious individuals have a drive for knowledge and new experiences
(Kashdan et al., 2009; Shaw et al., 2003). To this end, curiosity is captured as a sensitivity to
information gaps (Berlyne, 1954; Loewenstein, 1994) and a call for explanation adequacy
(Berlyne, 1954) of discrete questions triggered by “uncertainty” (Colquitt and Chertkoff,
2002). As such, curious individuals “engage in comprehensive and analytic scrutiny of the
arguments in an explanation” (Shaw and James, 2006, p. 30) and surfaces when gaps in
competence and knowledge exist (Kashdan et al., 2009). While it raises the decision makers’
predictive capabilities to a new level of outcome understanding, it also has the potential to
raise the level of confidence in the outcome expectations. This can surface as
“over-confidence” because of an intolerance for uncertainty (Simon et al., 2003).
2.6.4 Operationalized synergy between the motivational enablers. “The way management
frames their risk decision is partly by formulation of norms and culture and partly by
personal characteristics” (Tversky and Kahneman, 1981, p. 453). As a result, the combined
effect of stretching these personality traits can bias risk choices with a resultant negative
impact on risk mitigation. Drawing on the writings of various psychology researchers
(Langer, 1989b; Brown and Ryan, 2003; Bishop et al., 2004; Kashdan et al., 2009), we have
operationalized three main behavioral framing elements. The idea underlying the choice of
these variables was that they are all directionally related to estimating future anticipated
outcomes and are reflective of managerial judgment. The three components are conceptually
distinct; yet, they also overlap and tend to engender one another. Curiosity (pursuing
novelty) lessens the impact of a knowledge deficiency (Haaga and Stewart, 1992), optimism
(recognizing certainty) expands our creativity in challenging situations (Fredrickson, 1984),
whereas mindfulness (delivering insight) lessens self-judgment and raises awareness of any
limitations, biases and perceptions (Langer, 1989b). Separately, they are each a valuable lens
assisting in an investigative awareness for determining the degree of risk built into the
decision choice. Taken together, they maximize discovery and amplify risk analysis by Risk
providing an enhanced means to capture the inherent “uncertainty” built into the risk management
tolerance decision choice. By understanding these behavioral elements as a synergistic
association, we are narrowing the uncertainty-focused scope of managerial decision
and managerial
capabilities which in turn should lead to improved risk choices. mindset
3. Research model
To augment risk management research at the organizational level, we examine the degree in
27
which US community banks (under US$1.5bn in assets) rate their risk mitigation efforts. The
testable path model that guided this research is depicted in Figure 1 below. The model was
designed to manage uncertainty and to recognize the effect risk has on achieving
organizational objectives. In this way, risk is linked inextricably with performance in a
manner that allows management to identify, understand, discuss and act on the risk the
organization faces.
3.1 Clarifying key constructs and distinctions

The model incorporates outcome history and framing behavior as antecedent influences on
a risk tolerance (Sitkin and Weingart, 1995) and includes the relevant risk operating
variables developed by Al-Tamimi and Al-Mazrooei (2007). Thus, the holistic path model,
using strategic management terminology, captures the risk continuum from goal setting to
results, thereby revealing the distinctive shaping of the bank’s risk management capabilities.
To operationalize our thesis, we posit that the antecedent characteristics, or those
problem framing elements which includes symbolic artifacts including regulatory
constraints (regulatory Tier1 capital ratio and the loan/deposit ratio), outcome history
factors (relative industry asset size and earnings performance) and the bank’s senior
executives’ risk behavioral focus (their personality enablers), form a strong framing
relevance in defining the bank’s “tolerance” for risk. Bank management should be content
with this situationally defined risk tolerance, as it supposedly delivers the desired level of
firm performance and satisfies their framing references.
The aggregate amount of risk the bank is “willing and capable” of taking on (i.e. risk
propensity) sets the limits to risk choices and thus the resultant level of actual risk.
Regulatory and
Performance criteria
-Tier 1 capital
-Loan/Deposit ratio
-Peer performance
Risk Tolerance
Risk Practices Performance

Behavioral Traits
Figure 1.
-Curiosity Risk Propensity Conceptual model of
the determinants of
-Mindfulness
risk management
-Optimism framework
JRF Consequently, risk tolerance (how much risk banks can afford to take) will necessarily limit
18,1 the desired propensity for risk (how much risk banks are willing and capable of taking),
which in turn will limit the actual risk practices or appetite (how much risk banks actually
undertake) which in turn directly influences financial performance. Combined, these three
risk measures represent the bank’s “risk position” and sets the tone for the bank’s risk culture
and as such are considered requisite determinants for the optimization of risk/return
28 opportunities
Specific definitional details of the model are as follows:
3.1.1 Risk tolerance. Risk tolerance is defined as the boundary limits (threshold and
ceiling) of a bank’s commitment to risk-taking, and as such reflects a bank’s emotional
comfort with the uncertainty in measuring risk/reward trade-off (Bromiley, 1991; Greve,
1998). It requires an understanding not only of the market dynamics but also of a broader
philosophical approach informed by underlying beliefs and a comfort level with risk. As
such, it includes antecedent influences and is driven by outcome history (regulatory and
performance constraint criteria) and the managers’ disposition toward risk taking (i.e.
motivational biases). Administering risk tolerance is the goal setting process which is
dependent upon seeking an appropriate balance between risks being taken for achieving a
desired outcome. To this end:
H1. Risk tolerance directly and positively influences risk propensity.
H2. Risk tolerance directly and positively influences risk practices.
3.1.2 Risk propensity. Risk propensity represents the aggregate amount of risk the bank is
willing and capable of absorbing, and represents an assessment of the risk in a given
situational problem (Sitkin and Weingart, 1995), which is based upon the decision makers
probabilistic estimation of the degree of uncertainty, controllability and confidence held in a
choice situation. In other words, it is the amount of risk an organization can actually bear in
handling risk’s potential volatility or impact. Thus, risk perception is affected by existing
risk understanding and risk management heuristics (Simon et al., 2003; Al-Tamimi and
Al-Mazrooei, 2007). Ultimately, prudent risk management requires balancing the propensity
for taking risk against current risk appetite. Therefore,
H3. Risk propensity will directly and positively influence risk practices.
3.1.3 Risk practices. Risk practices represents the management governance tools and
techniques for systematically regulating the current risk amid alignment and adjustment
capabilities to the marketplace opportunities (Al-Tamimi and Al-Mazrooei, 2007). Banks that
better understand their risks and are better equipped at using risk management and
assessment techniques can detect lurking danger and discover the causal relationships
between activities or events and their latent effects, thereby achieving greater control over
their risk appetite. Furthermore, as firms become better at curbing adverse effects, they will
be less sensitive to risk impacts in general. Therefore, we hypothesize:
H4. Risk practices will directly and negatively influence the bank risk performance
success measure.
3.1.4 Risk performance. In evaluating the risk/return relationship, it requires a determination
of how much volatility (risk) is captured in comparison to the amount of return attained,
which is the coefficient of variation (COV) methodology (Wachowicz and Shreives, 1980;
Mumey, 1967). The lower the ratio of standard deviation to its mean return, the better your
risk-return tradeoff. Simply put, the lower the volatility in earnings, the more stable the
financial performance. Furthermore, consistency in the earnings stream is viewed as sound Risk
management, whereas fluctuations (high variance) is a reflection of unstable performance. management
3.1.5 The interaction between the variables. The interaction between risk tolerance and
risk propensity is a framework for assessing risk judgments and for providing flexibility in
and managerial
managing the risk process. The question arises then as to what happens when risk tolerance mindset
and risk propensity are out of alignment? In short, it furnishes a spread to the organization’s
risk comfort level with the likelihood of a potential financial shortfall, as the organization has
taken undue risk to satisfy future goals. The influence of a negative or positive spread will 29
find organizations attempt to take on greater risks or become more conservative to reach
targets (McNamara and Bromiley, 1997). Incorporating risk practices, which is the
governance and compliance structure, the risk/reward tradeoff is monitored against the
firm’s level of understanding and operational capacity. Ultimately, it is considered a
predictive model of risk management designed to optimize earnings performance.
4. Research design and data collection

A quantitative approach using a direct mail survey was adopted based on the model in
Figure 1. The unit of analysis is a community bank and its risk performance.
4.1 Survey administration

Study questionnaires were mailed in 2011 to a random sample of 1,800 banking institutions,
representing approximately 25 per cent of all banks under US$1.5bn in asset size located
within the USA. The stratified sample of banks ranged in asset size from US$25m to 1.5bn,
with an average of US$282m (SD ⫽ US$372m), which is in line with the industry average,
and was regionally distributed suggesting transferability to that sector (Table AI).
We sent questionnaires to the Chairman, President and/or CEO of each bank. In sum,
respondents had been in their current position on average for 14.5 years (SD ⫽ 10.8) and had
over 33.2 years (SD ⫽ 9.3) banking experience. The final cleansed sample reflected an 8.4 per
cent response rate, representing 151 valid bank responses (Tables AII and AIII). We
implemented several measures to ensure response accuracy, minimize the threat of
non-response bias and common method bias (Table AIV).
4.2 Research constructs and their operationalization

We used previously tested scales for main constructs. Overall, all scales were carefully
pretested with reviews by academics and a group of banking executives for question
structure, consistency and clarity (DeVellis, 1991; Bolton, 1993). A pilot was administered to
banking executives at a state banking school. The feedback was valuable for the final survey
instrument. Figure AI in the Appendix lists the final constructs with reliabilities.
4.2.1 Dependent variables
4.2.1.1 Bank risk performance. Our study builds on the COV methodology. It was calculated
by taking the 2006-2012 period’s standard deviation of ROA (return on assets) divided by the
average ROA performance. The ROA is net income divided by total assets and is a measure
of management’s efficiency in achieving a balance between yields and the costs of those
yields and thus represents the bank’s compensation for its current risk exposure.
4.2.2 Independent variables
4.2.2.1 Risk propensity and risk practices. The questions were adopted from the bank risk
research conducted by Al-Tamimi and Al-Mazrooei (2007). Their risk understanding and
risk management questions were combined (ten questions) for defining management’s
capabilities with respect to our new risk propensity construct. As for risk practices, their six
questions were adopted. One general question on banker interpretation of overall risk efforts
JRF was also included. A seven-point Likert scale was used with – 1 as “strongly disagree” and 7
18,1 as “strongly agree”, with higher scores reflecting a greater knowledge of current risk efforts.
4.3 Antecedent variables to risk tolerance

4.3.1 Outcome history
4.3.1.1 Relative performance criteria. Data were sourced from the FDIC’s Uniform Bank
30 Performance Report (UBPR). We adopted a relative financial performance (RELPERF)

measure based on an average net interest margin (NIM) performance for the 2006-2012
period, which is interest income minus interest expense divided by earning assets. To create
a “peer performance” review, the NIM results were categorized (ranging from 1 very poor to
9 most excellent).
4.3.1.2 Regulatory constraints. We adopted the average loan/deposit ratio (L/DRATIO)
and the average Tier 1 risk-based capital (TIER1) results for each bank over the 2006 to 2012
period. The underlying premise is that the lower the loan/deposit ratio and the bigger the
equity cushion, the safer the institution, or as Geithner commented these guidelines serve as
a “shock absorber, the first line of defense against losses” (Geithner, 2014, p. 92).
4.3.2 CEO personality traits. We adopted three measures as follows:
4.3.2.1 Curiosity. The “Curiosity and exploration inventory –II (stretching) scale”
developed by Kashdan et al. (2009) was adopted. A five-point Likert scale was used with 1
“very slightly or not at all” and 5 as “extremely”, where high scores reflect being highly
curious.
4.3.2.2 Mindfulness. We adopted the “Mindful attention awareness scale” or (Maas)
developed by Brown, and Ryan (2003), where the construct was measured by five questions.
A six-point Likert scale with 1 “almost always” and 6 “almost never” was used, where high
scores reflect greater mindfulness.
4.3.2.3 Optimism. The “Revised Life Orientation Test (LOT)” developed by Scheier, and
Carver (1985), where the construct was measured by five questions was used. A five-point
Likert scale with 1 “strongly disagree” and 5 “strongly agree” was used, where high scores
reflect greater optimism.
4.4 Control variables

We included three control factors that might affect the level of risk tolerance and the
risk-adjusted return that could be expected. They are CEO tenure, CEO work experience and
firm size. These variables have been shown to have meaning in other research (Hambrick
and Mason, 1984; MacCrimmon and Wehrung, 1990; Levitt and March, 1988). Also, while
gender has meaning in other industries (Arch, 1993), gender was not included in this
analysis, as it is a male-dominated industry (97 per cent were male).
4.4.1 CEO tenure and work experience. The challenges of running a bank and possessing
extensive exposure to different economic cycles are important. It is pointed out there exists a
strong management homogeneity with CEOs in the analysis having some 33 years’ work
experience and on average having 14 years in their current senior management position.
Hence, we controlled for tenure (YRSJOB) and experience (YRSEXP) which are measured by
respondents’ length of time in years.
4.4.2 Relative asset size. The bank’s average assets over 2006-2012 period was used.
5. Statistical data analysis

Exploratory factor analysis was undertaken to identify composites. The 31 initial
questionnaire items yielded a five-factor solution with 22 items, explaining 55 per cent of the
extracted variance. All of the factors were above 0.5 with average 0.7 on the pattern matrix,
composite reliability (Cronbach’s alpha) was satisfactory being above standard 0.7 (refer Risk
Figure AI in the appendix). management
and managerial
5.1 Model fit
We used AMOS to perform confirmatory factor analysis. The model (excluding controls
mindset
which were insignificant) had an acceptable goodness-of-fit results (␹2 ⫽336.5, df ⫽ 267,
␹2/df ⫽ 1.260 and p ⫽ 0.001). As for absolute fit, the RMSEA ⫽ 0.042 was within a narrow 31
range (Lo ⫽ 0.026 to HI ⫽ 0.055 at the 90 per cent confidence level) with Pclose of 0.84 and the
values for SRMR ⫽ 0.072. As for relative measures, GFI ⫽ 0.86; CFI ⫽ 0.95; PCFI ⫽ 0.85 were
also considered adequate. Overall, as for model fit, the significant standard loadings (p ⬍
0.01) suggest good convergent validity. To test the reliability of the model, measures for
composite reliability (CV) and the average variance extracted (AVE) were calculated
(Anderson and Gerbing, 1988). The factors were above the standard thresholds with CV ⫽
0.7, suggesting adequate reliability (Straub, 1989), and the AVE estimates were above the 50
per cent rule of thumb (Hair et al., 2010). The standardized residual covariances were
satisfactory as was the square root of the AVE (average variance extracted) comparison to all
other constructs (Gefen et al., 2000) and thus exhibiting good discriminant validity (Fornell
and Larcker, 1981). The path diagram supported the core hypothesis except for the direct
effect of risk tolerance to risk practices. Overall, the finding are highly encouraging and as
such the model which is considered exploratory adds credence to our risk management
conceptualization (refer Table AV for loadings and reliability; Table AVI for correlation
matrix and Table AVIII for hypothesis standings) and was predictive of firm performance
(R ⫽ 0.434, R2 ⫽ 0.188, adjusted R2 ⫽ 0.145), with F-test significance (F ⫽ 4.392; p ⬍ 0.000).
To gauge the models capacity for determining discriminatory value, the factors were
measured against relative peer financial performance (Table AVII). As shown, Excellent
performance was augmented in part by conservative behavior. These banks, as envisaged
reported the best performance statistics, exhibit slightly lower behavioral influences, have a
medium risk appetite and the highest average risk practices which when combined provides
for the highest earnings results, and thus, the best risk return trade-off. These banks
outperform rivals and obviously hold a competitive advantage. Fair performing banks are
wedged in the middle and while their aptitude for risk is strong and they are leaning toward
conservatism, they are not achieving the best-in-class financial results. The Poor performing
banks are facing financial pressures and despite believing they have a comprehensive
approach (all paths being significant), by being highly curious (searching for new options)
and applying lower mindfulness (without thinking of alternatives) directionally suggests
these poor performers may tend toward greater risk taking, and thus are perhaps destined to
remain on the bottom of the competitive ladder.
As expected, the managerial mindset items loaded positively and significantly on risk
tolerance. On a peer comparison analysis basis, the higher the behavioral traits of curiosity
and optimism, which tend toward manager overconfidence, drove a marginal propensity for
greater risk-seeking. Also, the more mindful the firm, the prospect for less risk-taking was
apparent. In the final analysis, it is the quality of risk management practices that makes a
difference, so respondents were asked a general question: “Overall, I consider the level of risk
management practices of this bank to be excellent”. The bank executives responded with a
score of “somewhat agree” (M ⫽ 5.15, SD ⫽ 0.80), and on a relative basis, the responses
matched expectancies – Excellent (M ⫽ 5.42; SD ⫽ 0.97); Fair (M ⫽ 5.24; SD ⫽ 1.20) and Poor
performers (M ⫽ 4.80, SD ⫽ 1.31). On the whole, the findings firmly suggest opportunity for
risk management corrections.
JRF 6. Discussion
18,1 Research on how risk is operationally managed, leveraged and coordinated in community
banking organizations has been lacking. This exploratory research speaks to this gap by
establishing how an effective risk management process and a related organizational mindset
can be a solution for maximizing the risk/reward opportunities. The holistic model evidenced
that decision makers deal with risk choices through a “risk-culture” that is dependent upon
32 their awareness and understanding of the risk trade-offs. Our analysis showed the
synergistic relationship of the risk enablers produces discriminatory value. A complex set of
relationships as a unifying operating system was proposed and tested. The research analysis
raised the importance of finding alignment with motivational enablers, and balancing the
bank’s risk capabilities and its risk governance so as to maximize risk management
performance. Not surprisingly, non-adherence of this relationship goes a long way to explain
why one-third of banks are sitting on the bottom of the performance ladder. The analysis
contributes to the risk discussion in four ways as follows:
First, the model represents a “conceptual model of thinking capacities”. The findings
support the relationship between risk tolerance, risk propensity and risk practices which
represents the bank’s overall “risk position”. It is the continuous interaction of these drivers
that fosters adaptive behavior and steers practices, beyond either a policy of inaction or
aggressiveness toward a formalized risk process designed to cope with uncertainty and to
optimize risk and return. The risk model focusses on applying directional framing drivers
that can guide, limit and control the risk/reward outcomes. Based on this understanding, the
ability of managers to think more complexly is fundamental to this analysis. Specifically, it
is directed at management’s risk/reward balancing capability in complex, uncertain and
fluid task settings. By developing the institutional core competencies, the organization can
systematically improve outcome expectations.
Second, risk management was shown to be a predictable “business process” and that
tolerating imperfections in risk decisioning can subsequently impede organizational
performance. It is well documented that decisions are the result of a sequence of behaviors (Cyert
and March, 1963), and decision-making processes are related to strategic success (Dean and
Sharfman, 1996). So, with risk mitigation focusing on those potential negatives that affect success
(e.g. decision outcome failure and/or discrete losses), and when outcomes do not meet
expectations, it represents a vulnerability within the risk-choice decisioning process. In this sense,
managers are accountable for their risk/reward imbalances and risk choice exposures, and
accordingly it makes risk a predictable outcome.
In many ways, our findings revealed this vulnerability, as an organizational and cultural
susceptibility characterized by self-imposed operating constraints reflective of
management’s judgment capabilities. When we discuss judgment, we are questioning the
accepted view and searching for novel distinctions. Thus, a mindful approach and a curious
attitude, which was evident in excellent performers makes sense as influential aspects of risk
management success, as it nurtures an ability to challenge the complexity of the
choice-situation. When faced with dynamic, uncertain or ambiguous environments, the
notion of a problematic expectation can be made much clearer. Of course, this still does not
guarantee total success, as any investment opportunity may end in catastrophic loss due to
unforeseen circumstances. But it is this uncertainty or the chance of a failed outcome that
symbolizes the need for value judgment excellence. Simply put, to achieve risk management
excellence requires faultless judgment. As Eastburn and Boland (2015) suggest, mindfulness
when calibrated to the complexity of the decision being made sustains judgment and thus
can represent a valuable distinctive competitive advantage.
Third, the present study demonstrates how framing a unique set of decision enablers Risk
(performance history, regulatory constraints and behavioral influences) are translated management
beyond the confines of risk tolerance to capture an informed understanding of risk at the
margin. As McKenzie and coauthors made clear:
and managerial
mindset
[…] most managers use pre-existing frames of reference to handle ill-structured problems, a few
demonstrate greater cognitive flexibility (Spiro et al., 1987) fluidly adapting their mental schema to
consider other angles (McKenzie et al., 2009, p. 214). 33

Consequently, framing can promote risk-seeking propensity for gains. Of course, when
proportioning these decision enablers to effect the best risk choices, it calls for a reliance on
quality judgment and how deeply this judgment is embedded within the corporate mindset.
For example, when risk tolerance and the propensity for risk choices are at odds, it surfaces
as a gap and the magnitude of that gap (preferably minimal) reveals how deeply risk
management capabilities are embedded in the organization. Accordingly, this study
contributes by raising these specific behavioral, regulatory and financial decision enablers
as being beneficial reference points and a best practice to adaptive management for building
the corporate risk mindset. While there are other possible enablers, this study is one of the
first to associate them with improving the risk governance process.
Fourth, the study findings show that risk management excellence drives firm discrimination.
Several commonalities in the way risk is viewed and managed was evident. In particular, we
show that high performing banks do indeed benefit from practicing incrementally conservative
behavior. Risk therefore is far more than some measure of potential losses. Rather risk is at the
core of the bank’s overall corporate strategy and as such is reflective of satisfactory financial
returns. The objective therefore should not be to minimize, or avoid all risks, rather it is to find the
optimal level that balances the risk/return tradeoffs. Overly-aggressive risk attitudes can foster
outcomes which can ultimately undermine financial performance, while risk-averse activity can
have its own ramifications on profits. It is this risk/reward conflict, which is central to the decision
process to be embraced by management, and the ability to absorb unanticipated losses with
enough margin to inspire continuing confidence in the bank’s on-going performance sets the
ultimate goal.
Ultimately, achieving risk management excellence “is much easier said than done”, being
it is a task most complex. When for example bankers lend funds, it is inevitable that some
loans will default, the problem being which ones or how many. Some banks may be more
liberal than others, and are willing to take a greater risk. Others may decline the loan. Being
highly “risk-averse” (i.e. restricting loans to only risk-free opportunities) not only might
minimize defaults but also inhibit overall profit. Yet in making risk decisions, management
must stand ready to bear the consequences – be they good or bad. Accordingly, they are
accountable and knowing in advance that a risky venture will generate a higher return only
makes sense if the venture does not end in failure. It follows that the extent to which a bank
can absorb risk more consciously and can anticipate and preemptively respond to any
potential adversities, the sounder and more valuable their risk management process is for
satisfying institutional goals. The holistic model evidenced decision makers’ risk choices are
defined by a “risk-culture”, when working soundly it can only translate into greater success.
7. Limitations
Although this research takes a logical step toward understanding the relationship among
cognitive biases that are directed toward managing uncertainty and the operating guidance for
overseeing risk performance, the reader should be aware of the need to build upon these results.
For example, several limitations should be noted. First, our sample, while considered adequate for
our inquiry was small (n ⫽ 151), although it was nationally and evenly distributed. We did not
JRF include large money-center banks, super-regionals and regional banks with assets exceeding
18,1 US$1.5bn. These larger banks represent a small proportion of total banks but hold significant
asset size advantages and are far more sophisticated in product offerings, and they also operate
across greater geographic areas. Consequently, their modus operandi is far different from
community banking. Second, while our results confirm the value of the study, it is to some degree
exploratory. Our study was conducted on banks and needs to be related to a wider range firms
34 and industries. We chose senior executives as our focus of attention, they had extensive job tenure
and experience; however, it could be argued that it supports single-informant data. Regardless,
the next level of executive management may have a unique perspective on how well their firm
processes risk. Third, models are generally incomplete depictions of real-world phenomena, and
our narrowly framed model has likely overlooked some potentially important, relevant relations
and issues. Fourth, in designing the study, recall that we did not access specific individual risk
taking choices, rather we assumed risk existed as an existing portfolio that was captured in
average earnings performance. Keep in mind that the anticipated financial impact of risk
decisions is excluded because gains/losses have not yet occurred. However, the philosophical
risk/reward approach should be consistent on a past decision basis (Fahlenbrach et al., 2012).
Consequently, without strategic change the past is destined to continue. While the study
calculated robust findings, other risk/reward measures relevant at the organizational level could
be considered for future studies. Finally, the fact that our survey was conducted at a time just after
banks experienced an adverse economic climate and organizational activities in reducing risk for
performance gains may be somewhat restricted. Accordingly, the study did not address risk
management under economic growth periods.
8. Future research options

Our work offers a novel foundation for understanding what is required to address risk
mitigation. We recognize ripe opportunity exists for more focused inquiry on securing a
greater understanding of the behavioral influences that drive the risk mindset. Other
research paths could include inquiry about risk outcomes experienced by different manager
levels within the organization. Others might expand this work by investigating the risk
management framework experienced by senior executives in money-center and international
financial institutions as well as firms in other industries. Research is encouraged specifically
on warning signals that preempt losses and how they are interpreted and addressed (or not)
by managers. In the future, scholars should begin to examine effects of other cognitive biases
that are of potential for affecting risk behavior, such as “overconfidence” (Levinthal and
March, 1981; Simon et al., 2003) or effects with “reward systems” and so on. Consequently, as
risk tolerance influences risk taking, it becomes important to determine what leads to such
variations within risk tolerance.
Our findings, especially if replicated in additional empirical research, should be of interest
to financial industry leaders and to policy makers and regulators. First, managers need to
understand how an active orientation of risk tolerance, risk propensity and risk practices are
coordinated across their organization. Second, managers need to understand how
characteristics of risk management manifest itself within their organization in terms of
productivity and financial performance.
9. Conclusion
Without doubt, risk management is a constant struggle for banks. This research has
attempted to elevate the risk conversation by embracing a more strategic and adaptive
behavioral perspective – by interpreting risk as conceptual model of thinking and as a
predictable business process, and by offering specific decision enablers to complement
the corporate mindset. Collectively, this theoretic detail has been designed to develop a
safety net against unsafe risk practices so as to more conscientiously anticipate any Risk
imbalances with the risk/reward trade-offs, and to appreciate that current financial management
performance is direct measure of past risk capabilities. and managerial
mindset
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Appendix Risk
management
and managerial
Banks by profit performance groupings mindset
Total marketa Mailed Actual responses received
Profit performance Banks (%) Mailed (%) Banks (%) Response rate
Excellent 1,450 19 218 15 17 10 7.10 41

Good 1,590 21 492 27 46 28 8.70
Fair 2,480 33 655 36 67 42 9.20 Table AI.
Poor 1,970 26 455 23 35 22 7.20 Banks by profit
7,490 100 1,820 100 151 100 8.30 performance
groupings (Banks
Notes: a FDIC data as of September 2010; Performance divided into Excellent with ROA ⬎ 1.25%; Good: 0.8 under US$1.5bn in
to1.2; Fair 0.2 to 0.8; Poor ⬍ 0.2 assets)
Bank size and employed-respondent descriptives

Respondents
Asset size (US$m) Banks Total assetsa (US$m) Average bank assets US$m YRSJOB YRSEXP
1-100 57 3,570,089 62.8 14.2 (12.0) 33.1 (10.8)

100-250 45 7,136,020 157.3 12.9 (10.4) 32.3 (8.7)
250-500 28 9,487,266 335.4 14.4 (9.5) 32.1 (7.3) Table AII.
500-1,000 11 7,660,271 677.8 16,1 (9.3) 33.8 (7.8) Bank relative size and
1-1.5 B 10 12,032802 1,203.3 14.8 (11.9) 34.9 (8.8) respondent
151 39,782,460 263.5 14.0 (10.8) 32.8 (9.2) descriptives (Banks
under U$1.5bn in
Notes: a Bank average assets for 2006-2011 period; SD is shown in parentheses assets)
Respondents descriptives
Respondent tenure statistics
Job title category Tenure Mgr# YRSJOB YRSEXP
Chairman/Chairman and CEO 15 0-3 years 12 2.3 30.7

President 42 3-5 28 3.9 28.3 Table AIII.
President and CEO 51 5-20 63 11.4 31.2 Respondents
CEO 32 20-30 32 24.0 35.6 descriptives (Banks
Other (EVP, SVP, VP) 11 30⫹ 16 36.0 44.2 under US$1.5bn in
151 Average 151 14.0 32.8 assets)
JRF
18,1
Survey test Determination
Response accuracy Response accuracy was checked by answers to reverse items and
with one duplicated question. Eleven surveys were excluded as
42 these banks were recently formed. Two surveys had missing

data, well below the 5 per cent suggested breakpoint
(Tabachnick and Fidell, 2007). We applied the “mean
substitution” method (Hair et al., 2010) to provide a usable
sample (N ⫽ 151)
Non-respondent bias Non-response bias proved insignificant when comparing the
means of responses of principal constructs of the earliest 25 and
latest 25 responders (Armstrong and Overton, 1977). Wilk’s
Lambda was 0.95 (p ⫽ 0.05) indicating th ere was virtually no
difference between the two groups. Random follow up calls to 10
non-respondents found two reasons for non-participation: they
were too busy or had a “no survey” policy
Common-method bias (CMB) While common method variance is present, it is not strong
enough to produce significant bias. Common method bias was
analyzed because of the reliance on a single instrument (a direct
mail survey) for data collection. The following methods were
adopted: the Harman’s single factor test showed the variance
could not be explained by a single factor after removing highest
score item (Podsakoff and Organ, 1986), applied the correlation
matrix which showed t hat correlations of the latent constructs
are below the 0.90 threshold (Pavlou et al., 2007) and the addition
of a common factor variable (Podsakoff et al., 2003) as a
surrogate for method variance was applied, and the structural
Table AIV. parameters with and without this marker in the model thereby
Survey accuracy showing significant paths remained virtually unchanged
RISK TOLERANCE Scale
Cronbach
alpha
Mean (SD) Risk
Al-Tamimi, H. A. and Al-Mazrooei, F. 7 Point Likert with 1
management
Banks’ Risk Management: A comparison study of UAE national
and foreign banks. The Journal of Risk Finance, 2007:8 (394-409)
“strongly disagree”
and 7 “strongly agree
0.809 and managerial
RM1* - There is a common understanding of risk management across the bank 5.22 (1.29) mindset
RM2 - Managing risk is important to the performance and success of the bank 6.60 (0.62)
RM3 - It is crucial to apply the most sophisticated techniques in risk management 4.74 (1.38)
Our bank’s objective is to expand the applications of advanced techniques in risk 4.76 (1.27)
RM4 -
management 43
RM5* - Risk management is a formalized practice at our bank. 5.19 (1.27)
Our bank carries out a comprehensive and systematic identification of its risks 4.78 (1.36)
RU1* -
relating to each of its declared aims and objectives.
RU2 - The bank finds it difficult to prioritize it main risks 3.25 (1.48)
Changes in risk are identified and are identified with the bank’s roles and 5.35 (1.06)
RU3 -
responsibilities
The bank is aware of the strengths and weaknesses of the risk managements in 3.58 (1.40)
RU4* -
“other” banks
The bank has developed and applied procedures for the systematic identification 4.48 (1.19)
RU5* -
of opportunities.
RISK PRACTICES
7 Point Likert with 1
Al-Tamimi, H. A. and Al-Mazrooei, F.
“strongly disagree”
Banks’ Risk Management: A comparison study of UAE national
and 7 “strongly
0.8
872
and foreign banks. The Journal of Risk Finance, 2007:8 (394-409)
agree”
The bank’s executive management regularly reviews the organizations 5.79 (1.17)
RP1 -
performance in managing its risks
RP2* -
The bank has highly effective continuous review/feedback on risk performance 4.95 (1.32)
The bank’s risk management procedures and processes are documented and 5.12 (1.36)
RP3* -
provide guidance to staff about managing risks.
RP4* - The bank’s policy encourages training programs in the area of risk management. 5.32 (1.20)
RP5* - The bank emphasizes the recruitment of highly qualified people in risk mgt. 4.99 (1.45)
RP6* - Efficient risk management is one of the bank’s objectives 5.60 (1.23)
RISK TOLERANCE - CURIOSITY
Kashdan, T. B., Gallagher, M.W., Silvia, P. J., Winterstein B. P.
Breen, W. E., Terhar, D & Steger, M. The curiosity and Likert with 1 “very
exploration inventory-II: Development, factor structure, and slightly or not at all” 0.822
psychometrics. Journal of Research in Personality. and 5 “extremely”
2009: 43 (987-998).
CUR1 - I actively seek as much information as I can in new situations 4.20 (0.59)
CUR2* - I am at my best when doing something that is complex or challenging 3.86 (0.65)
CUR3* - I view challenging situations as an opportunity to grow and learn 4.05 (0.73)
I am always looking for experiences that challenge how I think about myself 3.71 (0.75)
CUR4* -
and the world
CUR5* - I frequently seek out opportunities to challenge myself and grow as a person 3.69 (0.83)
RISK TOLERANCE - INDIVIDUAL MINDFULNESS
Brown, K. W., & Ryan, R.M. Maas scale 6 Point
The benefits of being present: Mindfulness and its role in Likert scale with 1
psychological well-being. Journal of Personality and Social “almost always” and 6
0.858
Psychology. 2003:84 (822-848) “almost never”
IMIND1* - I rush through activities without being really attentive 4.33 (1.05)
I get so focused on the goal I want to achieve that I lose touch with what I’m 4.48 (1.01)
IMIND2 * -
doing right now to get there
IMIND3* - I find myself doing things without paying attention 4.56 (1.07)
IMIND4* - I find it difficult to stay focused on what’s happening in the present 4.67 (1.12)
IMIND5* - I do jobs or tasks automatically without being aware of what I am doing 4.67 (1.13)
RISK TOLERANCE - OPTIMISM
Scheier, M.F., & Carver, C. S. LOT 5 Point Likert with
Optimism, coping and health: assessment and implications of 1 “strongly disagree” 0.780
general outcome expectancies. Health Psychology, 1985:4 (219) and 5 “strongly agree”
OPT1 - In unusual times I usually expect the best 3.52 (0.97) Figure A1.
OPT2R* - If something will go wrong with me it will 3.87 (0.82) Survey constructs,
OPT3* - I am always optimistic about the future 3.71 (0.88) means and standard
OPT4R* - I hardly ever expect things to go my way 4.02 (0.76) deviations and
OPT5R* - I rarely count on good things happening to me 3.91 (0.87)
reliability
OPT6* - Overall, I expect more good things to happen to me than bad. 4.05 (0.76)
JRF Construct (Reliability) Indicator Standardized loadings
18,1
OPTIMISM (0.80) OPT2R 0.672***
OPT4R 0.877***
OPT5R 0.724***
OPT6 0.524***
44 CURIOSITY (0.80) CUR2 0.514***

CUR3 0.610***
CUR4 0.801***
CUR5 0.931***
MINDFULNESS (0.86) IMIND 1 0.719***
IMIND3 0.892***
IMIND4 0.709***
IMIND5 0.735***
REG/PERFORM DATA (0.09) LOANDEP 0.586***
TIER1CAP ⫺0.702***
PEER PERF 0.490***
RISK PROPENSITY (0.79) RU1 0.548***
RU5 0.851***
RM1 0.854***
RM5 0.601***
RISK PRACTICES (0.87) RP2 0.796***
RP3 0.867***
RP4 0.815***
RP5 0.719***
RP6 0.575***
Controls CEO YRS EXP ⫺0.065
CEO YRSJOB ⫺0.042
Log10ASSETS 0.062
Outcome ¡ Risk tolerance 0.384**
Optimism ¡ Risk tolerance 0.351**
Mindfulness ¡ Risk tolerance 0.400**
Curiosity ¡ Risk tolerance 0.681**
Table AV. Risk tolerance ¡ Risk appetite 0.550**
Measurement model Risk propensity ¡ Risk practices 0.805***
(with controls): factor Risk practices ¡ ROACOV ⫺0.275***
loadings and
reliability Notes: Standardized loading measures with significance *** p ⬍ 0.001; ** p ⬍ 0.05; * p ⬍ 0.1
Correlation matrix
Parameters Mean SD 1 2 3 4 5 6 7 8 9 10 11
1 Bank risk 1.58 7.38

2 Risk practices 4.41 0.92 ⫺0.293** 0.87
3 Risk propensity 5.22 1.07 ⫺0.178* 0.872** 0.82
4 Tolerance 1.66 0.23 ⫺0.094 0.639** 0.709**
5 Optimism 3.13 0.50 ⫺0.135 0.172* 0.173* 0.460** 0.78
6 Mindfulness 3.68 0.71 ⫺0.206** 0.278** 0.254** 0.521** 0.252** 0.86
7 Curiosity 3.99 0.74 0.046 0.391** 0.427** 0.865** 0.263** 0.277** 0.82
8 Performance criteria 1.32 0.72 0.040 0.204** 0.263** 0.517** 0.181* 0.175* 0.342**
9 LD ratio 70.2 17.3 ⫺0.049 0.105 0.158* 0.322** 0.129 0.115 0.179* 0.724**
10 Peer perf 4.45 1.81 0.030 0.127 0.192* 0.279** 0.041 0.119 0.142 0.605** 0.257**
11 Tier1 15.81 6.78 ⫺0.110 ⫺0.068 ⫺0.090 ⫺0.314** ⫺0.099 ⫺0.045 ⫺0.198* ⫺0.867** ⫺0.417** ⫺0.354**
Notes: *** p ⬍ 0.001; ** p ⬍ 0.05; * p ⬍ 0.1, N ⫽ 161; Reliability–Cronbach’s alpha is shown on the diagonal in italics
model
alphas and
45
and managerial
management
Risk
correlations for the

deviations, Cronbach’s
Means standard
Table AVI.
mindset
JRF Excellent Combined
18,1 Poor (n ⫽ 52) Good (n ⫽ 54) (n ⫽ 45) (n ⫽ 151)
Parameters Mean SD Mean SD Mean SD Mean SD
Risk tolerance
Regulatory constraints
46 L/D ratio (%) 72.6 15.8 70.9 17.8 64.0 18.6 69.5 17.6
Tier1 capital (%) 15.7 7.01 14.5 6.0 18.1 7.4 16.0 6.92
Performance
constraints
Net Interest margin, % 3.44 0.10 3.82 0.59 4.13 0.79 3.77 0.77
Behavioral constraints
Combineda 3.75 0.59 3.75 0.65 3.68 0.62 3.73 0.64
Curiosity 3.92 0.53 3.68 0.63 3.88 0.62 3.83 0.59
Optimism 3.56 0.48 3.58 0.60 3.51 0.46 3.55 0.52
Mindfulnessb 3.63 0.78 3.97 0.72 3.78 0.76 3.80 0.75
Risk propensity
Surveya (Likert 7) 4.86 1.31 5.07 0.92 5.05 0.96 4.99 1.07
Risk practices
Surveya (Likert 7) 5.11 1.1 5.35 0.96 5.39 0.86 5.19 1.04
Bank risk
ROACOV 2.24 1.96 0.49 0.55 0.22 0.17 1.06 1.53
ROAAVEc ⫺0.44 1.13 0.77 0.16 1.48 0.32 0.56 0.80
Controls
Ave. Assets (US$m)d 350 461 326 473 173 241 289 417
YRSJOB 14.2 11.3 14.9 11.8 12.7 8.6 14.0 10.8
YRSEXP 33.0 8.7 31.6 7.6 32.8 7.6 32.8 9.1
Table AVII. Notes: a Based on combining Survey responses for questions on Mindfulness, Curiosity and Optimism in the
Model statistics by model following (EFA) analysis; b Mindfulness construct converted to Likert 5 scale for comparison
relative financial purposes; c ROAAVE is average ROA for 2006-2012; d Ave. assets was calculated in the model as log10
performance assets
Trimmed
Risk
Hypothesis model management
and managerial
Core model
H1. Risk tolerance directly and positively influences risk propensity Yes mindset
H2. Risk tolerance directly and positively influences risk practices No
H3. Risk propensity will directly and positively influence risk practices Yes
H4. Risk practices will directly and negatively influence bank risk performance Yes 47
Antecedents to risk tolerance (using peer performance comparison as resultant guide)
H1a. Higher levels of regulatory Tier1 capital ratio will motivate a propensity for less risk Yes
taking and negatively influence (lower) risk tolerance
H1b. Higher levels of regulatory L/D ratio will motivate a propensity for less risk taking No
and positively influence (lower) risk tolerance
H1c. Higher levels of relative performance will motivate a propensity for less risk taking Yes
and negatively influence (lower) risk tolerance
H1d. Higher levels of optimism about future opportunities will motivate a propensity for undefined
greater risk taking and positively influence (raise) risk tolerance
H1e. Higher levels of individual mindfulness will drive a propensity for less risk taking Yes
and negatively influence (lower) risk tolerance
H1f. Higher levels of curiosity will provide a greater motivation about future opportunities Yes
and will drive a propensity for more risk taking and directly and positively influence
(raise) risk tolerance
Notes: All the antecedent hypothesis showed positive relationship to risk tolerance (refer Table VI) and the
desired level of risk tolerated is raised. Using peer performance guidance as a determination, we find some Table AVIII.
variations in the potential outcomes, although keep in mind these results are directional and requires further Hypothesis testing
research discovery results
About the authors

Ronald William Eastburn is an Assistant Professor of Management at the University of South Alabama.
He holds a BA degree from the University of South Alabama, an MBA degree from University of Central
Florida and a DM degree from Case Western Reserve University. He also is a graduate of the Stonier
Graduate School of Banking. His research interests focus on strategic management, decision outcomes
and the corporate mindset. Prior to teaching, he spent 20 years with a leading super US regional
financial institution, where he held many increasingly important management positions including
President and Chief Executive Officer of the credit card subsidiary. Eastburn is a principle in Regroup
Advisory, a management consulting firm to financial institutions. Ronald William Eastburn is the
corresponding author and can be contacted at: reastburn@southalabama.edu
Alex Sharland is the Assistant Dean at the University of South Alabama. He holds a BA (Joint
Honors) degree from the University of Stirling. He holds a MBA degree from Virginia Polytechnic
Institute and State University. He holds a PhD degree from The Florida State University. He has held
academic positions at Barry University and Hofstra University. In addition to his academic career, he
spent several years in the financial services industries in London, England. His research interests
include business-to-business marketing issues, school-to-work transition systems, marketing education
and ethics in marketing. He has served on the Board of Directors of several companies and has provided
consulting advice to many others.
For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
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Risk management and managerial mindset

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Risk management and Risk

Department of Management, University of South Alabama, Mobile,

1. Introduction The Journal of Risk Finance

uncertainties bounding their future performance. Deviations from expectations can 23

2.2 Bank risk-taking

2.3 Risk control

2.4 Risk behavioral influences

2.5 Risk-taking disposition

2.6 Management’s personal decision capabilities

3.1 Clarifying key constructs and distinctions

Risk Practices Performance

4. Research design and data collection

4.1 Survey administration

4.2 Research constructs and their operationalization

4.3 Antecedent variables to risk tolerance

30 Performance Report (UBPR). We adopted a relative financial performance (RELPERF)

4.4 Control variables

5. Statistical data analysis

consider other angles (McKenzie et al., 2009, p. 214). 33

8. Future research options

36 Management Journal, Vol. 34 No. 1, pp. 37-59.

38 Behavior and Organization, Vol. 2, pp. 307-333.

40 Vol. 211 No. 1, pp. 453-458.

Excellent 1,450 19 218 15 17 10 7.10 41

Bank size and employed-respondent descriptives

1-100 57 3,570,089 62.8 14.2 (12.0) 33.1 (10.8)

Chairman/Chairman and CEO 15 0-3 years 12 2.3 30.7

42 these banks were recently formed. Two surveys had missing

44 CURIOSITY (0.80) CUR2 0.514***

1 Bank risk 1.58 7.38

correlations for the

About the authors

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