Risk-Averse? You Might Be Middle Class

Some CEOs readily take strategic risk; others don’t. The risk-taking ones (Gates, Zuckerberg, Ellison—all college ‘dropouts’) get a lot of press, but they are less common than you might think. As Business Insider recently noted, University of Wisconsin researchers studied 5,000-plus American entrepreneurs over 12 years, and found that the ones who prudently started their companies while keeping their day jobs were one-third less likely to fail than those who leaped directly into new venturing.

Why do some play it safe while others throw caution to the wind? Suspecting that personal roots and upbringing might be a factor, Jennifer Kish-Gephart and Joanna Campbell, researchers at University of Arkansas and University of Cincinnati, respectively, surveyed 265 S&P1500 CEOs about their perceived class origins, as in lower, middle, and upper. They then measured these CEOs’ relative willingness to take firm-level strategic risk, as reflected in their companies’ R&D expenditures, capital expenditures, and value of long-term debt, controlling for firm size and firm governance characteristics, such as board size, average director age and tenure, average director ownership, etc. The authors found that CEOs who considered their class background to be lower or upper were more likely to engage in strategic risk taking than self-identified middle-class CEOs. Moreover, upper-class CEOs were more risk-embracing than lower-class CEOs.

However, Kish-Gephart and Campbell also found that the “manifestations of [social class] imprints can change over time,” namely, CEOs from lower-class backgrounds who gained elite education (such as the MBA) became more risk averse the more elite education they gained. This was not true for upper-class CEOs: even when they gained more elite education, their relative risk-taking was unaffected. The authors explain this education-related discrepancy thusly: because obtaining an elite education is not uncommon for upper-class individuals, these individuals “may not perceive (or objectively accrue) any significant increases in their economic or social capital as a result of graduation from an elite institution”—thus education has no additional effect on their relative risk-taking or risk aversion. In the authors’ survey sample, 25% of the upper-class CEOs attended an elite undergraduate institution, versus 10% and 14%, respectively, of lower- and middle-class CEOs.