Risk averse means being willing to pay money to avoid playing a risky game, even when the expected value of the game is in your favor.

Let's find out how risk averse you are. If you are a student, I'm guessing that €20,000 is a lot of money for you. A gift of €20,000 would make your life noticeably easier. Losing €20,000 would make your life noticeably harder. If you're a well-paid executive or CEO (Ha! Ha!), multiply my dollar numbers by ten, or a hundred.

Risk aversion is a concept in economics, finance, and psychology explaining the behaviour of consumers and investors under uncertainty. Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with a more certain but possibly lower expected payoff. The inverse of a person's risk aversion is sometimes called their risk tolerance.

A person is given the choice between a bet of either receiving €200 or nothing, both with a probability of 50%, or instead, a certain (100% probability) payment. Now he is risk averse if he would rather accept a payoff of less than €1000 (for example, €80) with probability 100% than the bet, risk neutral if he was indifferent between the bet and a certain €100 payment, risk-loving (risk-proclive) if it required that the payment be more than €100 (for example, €120) to induce him to take the certain option over the bet.

The average payoff of the bet, the expected value would be €100. The certain amount accepted instead of the bet is called the certainty equivalent, the difference between it and the expected value is called the risk premium.

I strongly believe that for companies, whether in the technology sector or otherwise, to enjoy long term growth and success, a model that includes taking calculated risks is a must. In my opinion, about 10% of projects that a company pursues should be in the risky category. If a company is satisfied in organic growth, sitting back and doing the same thing again and again will probably suffice to a point, but for real growth risks must be taken and a culture of innovation must be encouraged and nourished. Too many companies either get complacent or are unwilling to upset the status quo.

If that had been the case, Wipro would still be the Vegetable Products Ltd and not one of the leading providers of IT services in the world. Dell’s model of direct-to-consumer sales would not have seen the light of day if Michael Dell had not taken the risk. Ideas and concepts are not very useful if nothing is done about them. This does not mean that every potential risky project should get the green light, or that every vegetable oil company would prosper by pursuing IT services. This does not suggest that risks should be random. In most cases that would be foolhardy and counterproductive. Great leaders are those that learn to evaluate risks, and can identify the right ones often enough. Managers and executives would do well to look at the kinds of risk some of the greats have taken and learn from them. IT is a high-risk profession, yet some organizations are reluctant to assume reasonable levels of IT risk. When an organization is too cautious in dealing with the issue of risk, it may fail to gain all the potential benefits of information technology.