TALKING AND THINKING RISK MANAGEMENT
RISK MANAGEMENT’S CONTEXT-SPECIFIC MEANING TO THE REAL ESTATE MARKET UNRAVELED BYMAKING SENSE OF THE THOUGHTS AND ACTIONS OF ITS DECISION MAKERS
R.B. VAN DER LECQ
TALKING AND THINKING RISK MANAGEMENT
RISK MANAGEMENT’S CONTEXT-SPECIFIC MEANING TO THE REAL ESTATE MARKET UNRAVELED BYAUTHOR: R.B. VAN DER LECQ
STUDENT NUMBER: 10317449
SUPERVISION: DR. F.J. DE GRAAF
TABLE OF CONTENT
1. INTRODUCTION ... 8
2. LITERATURE REVIEW ... 11
2.1 SENSEMAKING ... 12
2.2 DECISION MAKING ... 16
2.3 RISK AND ITS MANAGEMENT ... 20
2.4 TOWARDS THE UNKNOWN ... 23
3. RESEARCH DESIGN ... 26
3.1 RESEARCH PHILOSOPHY ... 26
3.2 RESEARCH APPROACH ... 30
3.3 RESEARCH DESIGN ... 32
3.4 METHODOLOGY ... 34
4. ANALYSIS & RESULTS ... 39
4.1 SENSITIZING CONCEPTS ... 40
4.2 CONNECTING THE DOTS ... 49
5. CONCLUSION ... 66
5.1 CONCLUSIONS ... 66
5.2 CONTRIBUTION ... 69
5.3 LIMITATIONS ... 69
5.4 SUGGESTIONS FOR FUTURE RESEARCH ... 69
REFERENCES ... 71
ABSTRACT
Risk management as a conception is meaningless. Its ambiguity makes it often non-exchangeable within conversation. Most decision makers do have a conception of risk management, but these conceptions differ among different decision makers. Therefore a shared sense of meaning or plausible image of risk management is not available. Studies so far have mostly focused at abstract reasons to deploy risk management and methods of measurement (Froot et al., 1993; Fama and French, 1993; Markowitz, 1991; March and Shapira, 1979; Sharpe, 1964). This study departs from prior studies as it examines the context-specific meaning risk management has to the actors that perform it. The focus of the study therefore is to uncover a shared meaning or plausible image of risk management that is exchangeable between different decision makers. The study does this by interpreting the foundational values that decision makers attach to risk
management. It therefore takes the Dutch real estate market as a case. Sensemaking (Weick, 1995) has been adopted as an approach to deconstruct risk management into smaller portions that tell its story. This leads to eight concepts that are attached to risk management by a majority of the decision makers. Together these sensitizing concepts give a context-specific and plausible image of the story of risk management within the Dutch real estate market. The study contributes to the literature by revealing the place risk management has within decision making as it shows the different decisions covered by the risk management umbrella. With that, it provides the risk management literature with a conceptual framework of risk management. Further, it provides various
directions for future research. For practitioners the study provides an exchangeable conception of risk management that is helpful within conversation and in addressing managerial attention where it is needed most. The results of the study confirm that risk management is an ambiguous concept. The results show it covers many decisions ranging from how funds are financed towards the internal organization of risk
management. It further covers choices about the distribution of risk among the portfolio as well as the monitoring of leasing income. Simultaneously decision makers need to keep an eye out for the liquidity position and commit to their own risk strategies that are explicitly written down within a risk profile. All of these decisions are covered by risk management. This shows that the narrow focus risk management studies often show, does not correspond with its perceived conception in practice. The research therefore provides a shared meaning or plausible image that reveals the place of risk
management within decision making and provides a conceptual framework on risk management decisions.
SAMENVATTING
Risicomanagement heeft geen conceptuele waarde. De veelomvattendheid van het concept maakt het moeilijk uitwisselbaar. Hoewel veel beslissers een bepaald beeld hebben bij risicomanagement, verschillen deze opvattingen op individueel niveau. Een gezamenlijk beeld ontbreekt. Vanuit de literatuur is er voornamelijk aandacht geweest voor de beschrijving van risicomanagement op een abstract niveau en ten aanzien van de methodieken die de meetbaarheid van risico’s indiceren (Froot et al., 1993; Fama and French, 1993; Markowitz, 1991; March and Shapira, 1979; Sharpe, 1964). Het
voorliggende onderzoek kiest een andere benadering door de betekenis van
risicomanagement te onderzoeken aan de hand van wat de actoren op dit gebied ervan maken. Daarmee richt het onderzoek zich specifiek op het inzichtelijk maken van de gezamenlijke voorstelling die beslissers hebben van risicomanagement. Het onderzoek doet dit door in te zoomen op de onderliggende waarden die beslissers verbinden aan dit concept. Het onderzoek zoomt in op de contextspecifieke betekenis van
risicomanagement. De Nederlandse vastgoedmarkt wordt daarvoor als casus genomen. Door gebruik te maken van sensemaking (Weick, 1995) wordt risicomanagement door middel van een proces van interpretatie ontleed in deelconcepten die duidelijk maken wat het begrip daadwerkelijk inhoud. Uiteindelijk leidt dit tot een achttal concepten die door een meerderheid van de beslissers wordt verbonden aan risicomanagement. Deze acht concepten kennen op hun beurt een verdere detailinvulling aan de hand van diverse aangetroffen fenomenen. Het totaal van deze concepten geeft invulling aan de contextspecifieke betekenis die risicomanagement heeft binnen de Nederlandse vastgoedmarkt. Het onderzoek levert een theoretische bijdrage, door het gebied dat risicomanagement binnen decision making heeft af te bakenen door inzichtelijk te maken welke beslissingen geschaard worden onder de paraplu van risicomanagement. Daarmee biedt het de literatuur een conceptueel kader ten aanzien van
risicomanagement. Dat kader verschaft tevens inzicht in de diverse mogelijke richtingen voor vervolgonderzoek. De praktische bijdrage van het onderzoek levert invulling aan het concept risicomanagement en maakt het uitwisselbaar tussen verschillende beslissers. Daarmee draagt het bij aan het wederzijds begrip in communicatie en het gericht toekennen van prioriteit aan specifieke beslissingen. Uit de studie blijkt dat risicomanagement een veelomvattende term is. De uitkomsten overkoepelen de processen die verband houden met de financiering tot aan de inrichting van de
organisatie en van de verdeling van risico door spreiding tot aan de monitoring van huurinkomsten. Gedurende deze processen dient er tevens oog te zijn voor de
liquiditeitspositie en het voldoen aan de strategie in de vorm van risicoprofiel. Dat alles is gebundeld binnen het begrip risicomanagement. De smalle focus die vanuit de
literatuur vaak gekozen wordt om risicomanagement te adresseren blijkt in de praktijk een veel bredere invulling te hebben. Dit onderzoek draagt dan ook bij aan het
inzichtelijk maken van de plaats die risicomanagement heeft binnen decision making en de conceptuele invulling die het vanuit de praktijk kent.
1.
INTRODUCTION
Prior research on risk management has mainly adopted a narrow perspective on the subject (Froot et al., 1993; Fama and French, 1993; Markowitz, 1991; March and Shapira, 1979; Sharpe, 1964). A perspective that mainly addressed what risk
management is about on an abstract level and provided methods of measurement. Often, focusing at classical investment markets such as bonds and stocks (Fama and French, 1993). Less attention has been given to the specific meaning of risk management and to alternative investment markets. This research contributes towards the literature by revealing the place risk management has within decision making as it shows the different decisions covered by the umbrella of risk management. It contributes to the practice as it provides real estate decision makers with a shared image of risk
management that is exchangeable within conversation. The new regulatory regime that has recently entered into force for alternative investment funds further stresses the importance of a shared understanding of risk management. The study extracts this understanding from the explicit story decision makers tell about risk management. It uses sensemaking (Weick et al., 2005) to do this. Making sense of phenomena is about giving meaning from what people in the direct context of those phenomena explicitly make of them (Weick et al., 2005). That means that what people within a specific context understand about their surroundings and make of it is what defines it. In other words, meanings materialize by making them explicit true words, either by language, talk or communication (Weick et al., 2005). Sensemaking in that light is about looking for a story’s content, rather than a judgment about the quality of that story. It is about making sense of phenomena within the actors surrounding that have not been made explicit yet. This makes sensemaking an interpretive process of exploration. Exploring the context-specific content of risk management is what this study is about. It uses sensemaking to do this. Therefore it takes both individual decision makers as well as the collective of decision makers as a unit of analysis. Explicitly, this shows in the methodology that is used. A short questionnaire directly targets the individual decision maker, while the annual reports focus at the collective meaning decision makers have attached implicitly within the narratives of the risk paragraph. The context-specific meaning of risk
management is extracted from textual analysis of these answers and narratives. Weick et al. (2005) illustrate this process, mentioning that phenomena “have to be forcibly carved out of the undifferentiated flux of raw experience and conceptually fixed and
labeled so that they can become the common currency for communicational exchanges” (Weick et al., 2005, p 411). In uncovering the context-specific meaning of risk
management, this quote perfectly illustrates the stated purpose of this research. Carving out phenomena and conceptually fixing and labeling them imagines the process of deconstruction. Deconstruction is the process used within this study to make sense of risk management. Risk management is rebuild as a conception through labeling and reallocating these carved out building blocks to display a plausible conception of its context-specific meaning.
Decisions are made countless times each and every day. Being big or small, conscious or unconscious, certain or uncertain. Everybody makes decisions and some more than others. Within companies, managers often make most of the decisions. They also carry the responsibility for the consequences of these decisions and are compensated for the risk they bear. Risk stemming from the uncertain outcome of their decisions.
Uncertainty and risk therefore are closely related. Uncertainty exists as risk exists. According March and Shapira (1979) risk is defined as “the reflection of variation in the distribution of possible outcomes, their likelihoods and their subjective values” (March and Shapira, 1979, p1404). The measurement of risk is qualified as “a measurement either by nonlinearities in the revealed utility for money or by the variance of the probability distribution of possible gains and losses associated with a particular
alternative” (March and Shapira, 1979, p1404). These definitions show the tremendous coverage risk management could possibly have within decision making. As most
decisions have some amount of risk within them, risk management could cover all decisions made under uncertainty. At least from a theoretic point of view. It therefore is important to look at the meaning risk management has in practice. Does is really
concern everything?
Risk management, for the last years, has gained on influence in the financial services industry. Since the beginning of the financial crisis, risk management has evolved from one of many topics decision makers have to deal with towards a top priority on the managerial agenda. Not in the last place, because regulators have developed stronger regulatory ruling concerning risk management1. Now being at the heart of regulatory activities, risk management seems to have evolved to maturity. That new status makes it
a more familiar concept among managers and has increased its presence in board rooms. Some big financials even added a CRO (Chief Risk Officer) to the board. While this attention has led to more focus on risk management, it has increased its ambiguity as well. As more activities have been addressed as risk management, its conceptual meaning has become wider, less obvious and subject to (managerial) interpretation. This leads to individual meanings of risk management, instead of shared meaning. Risk management has therefore become a container concept. Everybody does something with it, it seems to concern everything, making it meaningless in the end for both academic as well as practitioner usage. Therefore the question this study seeks to answer is:
How is made sense of risk management by real estate decision makers? Establishing a thorough research design to answer such a question starts with making major decisions about the direction of the study. The research question has been put central and the choice for a design lies more within terms of “appropriateness” rather than “rightfulness” (Saunders et al, 2009). Stemming from the research question, a qualitative research approach has been chosen. As the purpose of this study is to explore the context-specific meaning of risk management, a qualitative approach has been found appropriate. Academics differ on where such a research should start and the place theory should have within the research design. Yin (2009) mentions the importance of theory as a building block for a thorough research design. It is a stand adopted within this research as the literature review is the first chapter of this study. Followed by a chapter on the research design in which the decisions are made that make this study what it is. After the description of the structure of the research, the study advances towards the interpretative part in which the conception of risk management is decomposed into an extraction of phenomena. In addition, risk management is recomposed from the process of labeling, grouping and allocating phenomena to a higher conceptual level. Eventually resulting in a number of sensitizing concepts. Together these sensitizing concepts lead to a plausible image on the context-specific meaning of risk management. The study ends with a discussion on the findings, the limitations of the research and suggestions for future research.
2.
LITERATURE REVIEW
The study starts with a literature review to introduce sensemaking, decision making and risk and its management. Sensemaking is about interpreting meaning. Eventually, to derive at a stadium of shared meaning or a plausible image. Decision making is the umbrella that covers all decisions including risk management. It is discussed at a general level to understand how decisions are made and which managerial judgments and
biases are involved in this process. Risk and its management are discussed to narrow the scope of decision making towards decisions on risk. It also shows the different concepts that are attached to risk and its management from the literature. The literature review is concluded with a chapter in which sensemaking, decision making and risk and its
management are discussed in an integrated way. Sensemaking in this effort is the strategy that determines the line of sight of decision makers. The managerial
interpretation is input for the decision making process. Different biases and heuristics play a role in this process. Together, resulting in a particular view on risk taking and managerial action of decision makers. Within the conceptual model the relation between these three concepts are visualized, simultaneously displaying what this study seeks to answer.
2.1 SENSEMAKING
“Half of what I say is meaningless; but I say it so that the other half may reach you.”
Kahlil Gibran, Sand and Foam
Sensemaking is a conceptual bundling of interpretive processes that aim to structure specific environments in a meaningful way. The concept was introduced by Weick (1995) and has been defined in a variety of ways. Weick et al. (2005) define the concept as the ongoing retrospective development of plausible images that rationalize what people are doing. Gephart et al. (2010) define sensemaking as “an ongoing process of making intersubjective sense of shared meanings” (Gephart et al., 2010, p284-285). The establishment of shared meanings according to Gephart et al. (2010) takes place
through conversation. “Either by seeking, producing, negotiating or maintaining a shared sense of meaning” (Gephart et al., 2010, p284-285). Cunliffe and Coupland (2012) treat sensemaking as “collaborative activity used to create, legitimate and
sustain organizational practices or leadership roles” (Cunliffe and Coupland, 2012, p65). Whittle and Mueller reflect on sensemaking as a broader term that refers to “the process through which people interpret themselves and the world around them through the production of meaning” (Whittle and Mueller, 2012, p114). As this last definition
especially emphasizes with “production of meaning” it is difficult to determine meaning as its character is relative. Together these definitions of sensemaking lead to an
understanding that incorporates the collective process of individuals to structure the environment in a meaningful way so that they can communicate about their perceptive conception of what is happening explicitly to establish a deeper understanding of their surroundings. Weick (2012) points out a central issue in sensemaking: “the way in which people redeploy concepts in order to ward off blind perceptions, and redirect perceptions to ward off empty conceptions” (Weick, 2012, p151). With this, addressing the continuous cycle of change in meaning. Phenomena are continuously made explicit and meaningful by the people participating within the environment in which these phenomena exist. Resulting in explicit meaning of these phenomena through the
sensemaking process of what the actor in this environment understands of what is going on. Meanings materialize by making them explicit through words, either by language, talk or communication (Weick et al., 2005). Not surprisingly, sensemaking seems to occur “when the current state of the world is perceived to be different from the expected state of the world, or when there is no obvious way to engage the world” (Weick, 2005,
p409). It is the second reason that refers to the risk management situation. As multiple methods of measuring and dealing with risk exist, there is no such thing as an obvious way to deal with it. In that light sensemaking tends to be an excellent way of uncovering some sense of shared meaning. Moreover, because specifically within the early stages of sensemaking, phenomena “have to be forcibly carved out of the undifferentiated flux of raw experience and conceptually fixed and labeled so that they can become the common currency for communicational exchanges” (Weick et al., 2005, p 411). According to Weick et al. (2005) this process brings a responsibility with it for the actors within such an environment as they are hold responsible for interpreting phenomena within their environment both explicitly as retrospective. The assumption that is essential within sensemaking is one of meaning’s survival by the grace of the vote of its surrounding actors. Weick (1995) mentions this referring to the tendency within sensemaking discussions to assume that “meanings survive as a result of voting” (Weick, 1995, p6). Enabling the conclusion that as a result, events become less certain and presumption becomes more important to be able to produce meaningful shapes (Weick, 2012). This is an important matter as it leads to the careful replacement of the idea of “accuracy” by the idea of “plausibility”. An analogy with strategy can be made with the replacement of the idea of “planning” or “positioning” by the idea of “simple rules”. As Eisenhardt and Sull (2001) point out, a primary reason for this change has been the increased
complexity of the business landscape. As a result strategies have been simplified to cope with these changes environments. An approach that focuses at defining direction,
without confining it (Eisenhardt and Sull, 2001). It is a very similar idea Weick (2012) describes with “plausibility” for doing research. This similarity has not been unnoticed. Ancona (2011) mentions the tendency of sensemaking “to move from the simple to the complex and back again” (Ancona, 2011, p4). A process that starts with the collection of new information, continues with its identification and labeling and ends with
categorization and pattern recognition. This with the sole aim to reduce the complex to the simple again, while simultaneously acquire a higher level of understanding (Ancona, 2011). Ancona (2011) further summarizes the importance of the idea of plausibility by mentioning that: “plausibility as opposed to accuracy is more important in sensemaking stories and maps that explain and energize, that invite people to discuss, act, and
contribute ideas trump those that are more exclusively focused on trying to achieve the best possible picture of a reality that is changing and elusive” (Ancona, 2011, p7).
Plausibility is important for at least two reasons. Either because the story of what is happening remains unknown and needs exploration or because the story has been taken for granted without any questions, leaving its shared meaning unjustified. This is very similar to risk management where factors as probability and improbability tell the plausible story of what is supposed to happen or indicated extremely unlikely. Both risk management and sensemaking therefore are not about discovering the truth or accurate description. Instead, its focus is at a continual state of development. As the environment tells a continuous story, its meaning differs in time. Making the process of sensemaking a continuous effort of revealing its current meaning. Weick et al. (2005) point out that the emphasis of sensemaking is upon the continuous rewriting of an emerging story to display a bigger part of what is happening and make the story more complete. Not for reasons of more accuracy, but particularly to make it “more resilient in the face of criticism” (Weick et al., 2005, p415) The purpose of sensemaking according to Weick (2012) is within the construction of “plausible accounts of equivocal situations” (Weick, 2012, p145) . Ivanova and Torkkeli (2013) outline five issues useful for understanding interaction that led them to consider the concept of sensemaking. These issues are: ‘time’, ‘interdependence’, ‘relativity’, ‘jointness’, and ‘subjective interpretation’. While Ivanova and Torkkeli (2013) only discuss the content of subjective interpretation, the other issues mentioned do in fact resemble many of the earlier noticed conceptions in the various definitions of sensemaking. These five issues are helpful as they reveal the characteristics of sensemaking. As “time” can be labeled to the continuous process of sensemaking and to its current (plausible) shared meaning. “Interdependence” relates to the connectivity sensemaking has with the environment, its actors, and the
phenomena that have to be made sense of. “Relativity” mentions the nature of these shared understandings. An assumption that is fundamental to sensemaking as meanings survive by the grace of the vote of its surrounding actors. Weick (1995) mentions this pointing out the matter that discussions about sensemaking do tend “to assume that meanings survive as a result of voting” (Weick, 1995, p6). Adding to this that votes can be either equally or unequally weighted (Weick et al, 2005). This last part defines the relativity of any shared meaning to a large extent. If votes of actors within an
environment have different weights, the meaning of concepts might reflect a bigger or smaller representation and make more or less sense when generalized to the entire population within a certain environment. “Jointness” reflects the collective character on
the other hand again, which seems to make equal votes more likely than different weights. Lastly, “subjective interpretation” implies that “each individual has an
interpretation of its environment and the phenomena within it and therefore might base its following actions on its interpretation of previous actions” (Inova and Torkkeli, 2013, p718). These interpretations about the environment and its particular
phenomena can be labeled and made sense of through the use of sensitizing concepts. These concepts lack a description of what to see, but emphasize suggestions along which lines to look (Liu, 2005). That a concept is sensitizing, but not definitive, Blumer (1969) argues, “is not because of its immaturity and lack of scientific sophistication, but due to the nature of the empirical world which it is seeking to study and analyze” (Liu, 2005, p250). It is a notion that is closely related to the earlier mentioned idea of “plausibility” replacing “accuracy”. “Methodologically, recasting social representations as a sensitizing concept highlights the significance of the study of social representations from the actors’ point of view” (Liu, 2005, p252) As risk is a sensitizing concept by nature (Liu, 2005), sensitizing concepts seem adequate in uncovering the context-specific meaning of risk management. A prime aim of social representations research, as Markova (2003) states, is “to identify, describe and analyze the structured contents and meanings of
commonsense knowledge which are communicated in real life situations” (Liu, 2005, p253). Metaphorically, this brings down the concept of sensemaking to an enterprise of either stirring up dust or removing it (Weick, 2005). A matter that brings out the true nature of sensemaking: continuously questioning either the seemingly obvious or yet unknown. A process that is gone through by making phenomena explicit through a retrospective dialogue. All this with the sole aim to uncover a plausible snapshot of what is actually happening. A plausible image that can be used for managerial navigation. As decisions on risk are always covered in uncertainty, a plausible map would already be a big leap forward. This study aims to uncover such a map.
2.2 DECISION MAKING
“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”
Theodore Roosevelt
Risk management is part of a bigger picture: decision making. Both from a structure point of view as well as a content point of view. It therefore makes sense to start reviewing the literature at this umbrella concept. The literature review on decision making helps to get an understanding of decision making in general and the way decision makers perceive their role in this process. Discussing decision making it is important to look at the way decisions are made. The assumptions decision makers rely on, contribute enormously to the expected outcome of their decisions. People are not entirely rational. Experiments showed decision makers overvalue losses and undervalue possible upsides (Kahneman and Tversky, 1979). Kahneman (2002) extended this research adding the underlying assumption of bounded rationality. So decision makers are bounded rational instead of entirely rational. That acknowledgment is a major difference to the neoclassical view that dominated the discussion on decision making so far. The neoclassical view however, still is one of the dominating views as its deep entrenchment has made it resistant to many attacks (Simon, 1979). The effect of this reasoning being that decision makers assume they exist over all the important
information to make a decision, while this is unreasonable for at least two reasons. The first reason is that models can only partially resemble the information necessary for conscious decision making. Andrikopoulos (2012) showed this pointing out the various assumptions incorporated in financial models. This leads to a transformation of reality into a closed laboratory experiment resulting in models that do not resemble all
variables and create explanatory difficulties as they do not reflect reality anymore (Andrikopoulos, 2012). As a result the value of what we know is not exactly clear and its usability therefore is unknown as well. The second reason has to do with the inability to model the unknown. Probability distributions are useless if their underlying distribution remain unknown. While this seems obvious, the effects of not coping with this
phenomenon are represented within the events of recent history. A major example being the credit crunch that has not been taken into account in the leading economic models (De Graaf and Williams, 2009). This phenomenon is encountered quite often and seems a structural bias within the human mind. As Taleb (2010) strikingly points out
When they did happen, they were not modeled. However, it does not only seem to be a modeling problem. It is an information problem as well. Models do not represent all information about the world and it is the same principle that holds for decision making. Decision makers do not make fully informed decisions as a result of their bounded rational nature. This nature presents itself within two major decision biases, which decision makers themselves may not be consciously aware of. Availability and
representative heuristics (Tversky and Kahneman, 1973) are two dominant conceptions about the world that can easily lead decision makers to misjudgment. Availability is a judgment heuristic in which managers project their prior experiences on the
probabilities of uncertain future events and the likelihood of occurrence. Tversky and Kahneman (1973) call this phenomenon “illusionary correlation”. The danger of
extrapolating past experiences especially shows itself in situations of low frequency, low probability, but a high impact. Taleb (2010) calls this a “Black Swan”. According to Taleb (2010) risk management should these events, “but the paradox is that the human mind is often incapable of addressing these phenomenon” (Taleb, 2010). Stulz (1996) also refers to the emphasis risk management mentioning it should provide protection against “costly lower-tail outcome occurrence that would cause financial distress or make a company unable to carry out its investment strategy” (Stulz, 1996, p23-24). The contradiction being that this aim might be the essence of risk management, but
information to carry this out is not always available and when it becomes available it is often too late. The information that is available is affected by another judgment
heuristic: representation. The representative heuristic (Tversky and Kahneman, 1973) is about stereotyping people or situations. Perceived images are projected as a frame upon persons or situations to fit them within it, while in reality this suit does not fit them (entirely) or they behave differently than they are perceived. In the words of Tversky and Kahneman (1973) “the representative heuristic leads to a judgment of an event that is probable to the extent that it represents the essential features of its parent population or generating process” (Tversky and Kahneman, 1973, p207). This seems exactly the same error as encountered earlier at the modeling problem. Both the availability as well as the representative heuristic lead to a (possible) misconception about the world around the decision maker that impacts an (from the decision maker’s point of view) essentially rational decision. While availability and representative heuristics influence the decision process from the beginning, decision makers are also
subject to heuristics after their initial decision has been made. Managers are excessively intrinsically stimulated to stick to their initial decision making. Even when new
information proves them wrong. Schwenk (1984) describes this as a prior hypothesis bias as well as an adjustment and anchoring problem. Both are about the misuse, underestimation or ignorance of new information. As Schwenk (1984) points out this comes to view in denying evidence that proves decision makers wrong and in under adjustment when they do involve in repair actions. Eventually, this could result in escalating commitment. Escalating commitment (Schwenk, 1984) emerges as managers receive negative feedback on their decision making, but do not want to accept failure. In these cases managers allocate more resources to resist failure. This especially shows when there are external forces putting pressure on the manager (Schwenk, 1984). The possibility of job-loss is one of the main reasons managers try to change their
(sometimes unavoidable) faith of failure as is heavily organizational resistance in the decision making process (Schwenk, 1984). As these different heuristics show, decision making seems to be more difficult and far less rational than neoclassical theories on decision making imply. What is it that decision makers should do to make their decisions as flawless as their bounded rational nature permits? Saaty (1990) shows an approach to multi-criteria decision making using the Analytic Hierarchy Process (AHP). This approach looks at decision making from a comparison of multiple factors to end at an estimated judgment. While this seems comprehensive, it reduces the concept of bounded rationality in decision making to a rationalized decision. It assumes the information needed to make the right decision is present. Referring to the earlier
information problem such an approach lacks realism. The element of risk makes that an estimated judgment concerning all important factors cannot be made, because not all factors that contribute to the risk are known. Uncertainty is the element that makes it hard to make decisions about the future. Not everything is known. As Bell (1982) mentioned, decision makers sometimes regret their decisions with hindsight. This mainly stems from the fact that managers use models and projections and expect the utility that is projected by these matters. As these models do not incorporate all
variables and decision making is affected by multiple judgment heuristics, the expected utility of decision makers often does not match with reality. An exact match would be a low frequency, low probable event in itself. It would be a “Black Swan” (Taleb, 2010). Decision making in the end therefore seems to be about making the best possible
decision, with the available information and about reducing or accepting the uncertain negative impact of what is known. At the same time decision makers should be aware that they cannot rule out all uncertainty and will sometimes regret their decisions with hindsight (Jablonowski, 2005).
2.3 RISK AND ITS MANAGEMENT
“Never was anything great achieved without danger.”
Niccolò Machiavelli
Before an advancement can be made towards the context-specific meaning of risk management, a general understanding of the subject is essential. Even more trivial, a clear conception of risk is needed. What is risk? How is it perceived? How is treated? Discussing decision making on particular decisions requires a specific understanding of the characteristics of those decisions. As risk is the type of decision making this study focuses at, an understanding of risk is important. Risk therefore needs a clear definition before any advancement towards its management can be made. March and Shapira (1979) qualify risk as “the reflection of variation in the distribution of possible outcomes, their likelihoods and their subjective values” (March and Shapira, 1979, p1404). While this concept is not entirely rationalized and leaves room for “subjective values”, its meaning foremost seems to match the expected utility theory. A match with classical decision theory is further indicated within the description of risk measurement that is done “either by nonlinearities in the revealed utility for money or by the variance of the probability distribution of possible gains and losses associated with a particular alternative” (March and Shapira, 1979, p1404). Within this definition the link with the neoclassical view of rational decision making is much more obvious. Between the two definitions clear interpretation differences exist. This shows when these definitions are linked towards two popular methods used in today’s risk management practices. The methods used to illustrate this difference are the Capital Asset Pricing Model
(Markowitz, 1991) and the Sharpe ratio (Sharpe, 1964). The Capital Asset Pricing Model (CAPM) (Markowitz, 1991) looks at risk by diversifying it according to underlying correlation within the portfolio. This is closely related to the risk definition. On the other hand the Sharpe ratio (Sharpe, 1964) takes the variation with the market portfolio as a starting point for portfolio selection. This is more similar to the definition of risk
measurement. What is missing within both of these definitions is the assumption of bounded rationality (Simon, 2002). Both definitions expect the decision maker to be fully informed, as they assume that variations or correlations are known. As the earlier enquiry on decision making has shown, diverse biases impact the actual decision. Most time, not everything is known and when it is not every piece of information can be modeled. The original theories on risk and its subtracted definitions therefore do not
reflect the behavioral insights on decision making such as mentioned within prospect theory (Kahneman and Tversky, 1979). The theories on risk and methods of risk management therefore do not correspond with the insights that behavioral theories on decision making have shown. It would be interesting to find out which theoretical insights are adopted by decision makers and attached to the conception of risk
management. The literature so far has shown that two directions exist and they do not bridge each other. Different cognitive operating schemes of making sense about risk management therefore seem to exist.
Risk attitude reflects the mind-set of a decision maker towards risk-taking. Research shows two different directions on the origination of risk attitude. While some
researchers (Campbell et al, 2004) explicitly refer to it as a personality trait of the decision maker, others (Weber et al, 2002) treat it as a context-specific matter. While theory (Jablonowski, 2005) suggests managers to generally search for the highest returns with the lowest risks, differences in risk attitude do exist between managers. As both Campbell et al. (2004) and Weber et al. (2002) qualify different risk attitudes. Indicating categories of either risk seeking or risk averse (or somewhere in between). Whether the risk attitude of the decision maker stems from personality traits or is context-specific is not relevant to the research question of this study. The matter that differences in risk attitude exist is. As different attitudes might result in different descriptions of the same subject, it is important to keep in mind. It might lead to interpretation differences. This could cause different conceptualizations of the same phenomenon and will therefore be a matter to take into account during the data interpretation process further on in this study.
Risk perception is about the way decision makers perceive and value risk. The managerial perception of risk influences decision making (Arrow, 1982). Risk
perception itself is at the same time influenced by multiple biases. The availability of information (Tversky and Kahneman, 1973) for example affects the perception that can be formed on risk. Maybe even more consequential is the use of this information, as framing effects and representative heuristics (Tversky and Kahneman, 1992) could lead to different decisions on the same situation. The personal position of the decision maker effects the risk perception as well. As Schwenk (1984) shows experience and prior results could affect decision making. Effects such as escalating commitment, stemming
from prior hypothesis heuristics. Further, the decision makers’ cultural background could result in risk perception differences. As Weber and Hsee showed (1998) decision makers with different cultural backgrounds decided differently on the same investment scenarios.
Risk appetite knows many different explanations. Aven (2010) has extracted definitions of risk appetite which are shown in the table below. As this table indicates, most
definitions have in common that they are based on the amount of risk that an organization is willing to accept or to be exposed to.
Table 1 Definitions of “Risk appetite” (source: Aven, 2010)
Source Definition of risk appetite
ISO Amount and type of risk that an organization is prepared to pursue or retain COSO The amount of risk an entity is willing to accept in pursuit of value (it also
refers to the degree of risk, on a broad-based level, that a company or other entity is willing to accept in pursuit of its goals)
HM Treasury’s Orange Book The amount of risk that is judged to be tolerable and justifiable Institute of Internal Auditors The level of risk that an organization is willing to accept Dupoy The investor’s willingness to buy risky assets
Office Government Commerce U.K. The amount of risk the organization, or a subset of it, is willing to accept Towers Watson The total risk that an organization is willing to take to achieve its strategic
objectives and meet its obligations to stakeholders
IRMI The degree to which an organization’s management is willing to accept the uncertainty of loss for a given risk when it has the option to pay a fixed sum to transfer that risk to an insurer
BS Total amount of risk that an organization is prepared to accept, tolerate, or be exposed to at any point in time
BCI Willingness of an organization to accept a defined level of risk
KMPG The amount of risk, on a broad level, that an organization is willing to take on, in pursuit of value (or in other words: the total impact of risk an organization is prepared to accept in pursuit of its strategic objectives)
PwC The quantum of risk that the firm is willing to accept within its overall capacity Fxtimes The willingness to take certain risks for a potential gain
Important to emphasize are three parts that are visible in these partially overlapping explanations of risk appetite. First there is a set amount of tolerable risk. This implies a static condition of justifiable risk. At the same time there is acceptance, which indicates the cognitive conscious approval of the decision maker. Lastly there is exposure, which shows a dynamic status of risk and seems to contradict with the first part of the
collective explanation. What the definitions further imply is that the decision maker is in control in establishing a maximum amount of risk. This definition lacks the uncertainty involved with decision making. As multiple researchers showed (Kahneman and
Tversky, 1979 ; Bell, 1982; Jablonowski, 2005) uncertainty is what makes making the right decision difficult and causes regret in case it does not match the utility that is expected (Jablonowski, 2005 ).
After making a decision on the acceptable or tolerable amount of risk the actual
management of risk begins or more accurate put, it continues. Looking at the literature on risk management there are findings that the actual risk management process starts way beyond. From a corporate finance perspective the existence of risk management has diverse possible reasons. Froot (1993) mentions different rationales to involve in
corporate risk management. Ranging from managerial motives to diversify risk of ownership wealth within the firm to capital market reasons of reducing variability and avoiding financial distress. Stulz (1996) looks at it from a different angle and points out the insurance value of risk management. While both Froot (1993) as well as Stulz (2005) look at risk management from a perspective on corporate capital structure they point out certain rationales that are also important in portfolio management. Lower tail probabilities are directly related to a managerial concept of controlling financial risk. Value at risk has become a highly adopted concept as a method of measuring and approving financial risks (Jorion, 2007). While this gives decision makers handles and insight in financial risks, it undervalues extreme outcomes in the end of the tail. Value at risk in that sense might leave managers in the perception they are more in control than they actually are. While value at risk in essence is a helpful tool to gain insight into the financial risk within a portfolio, potential framing effects (Tverksy and Kahneman, 1973) might exist here as well.
2.4 TOWARDS THE UNKNOWN
Sensemaking has been introduced as an interpretative process with the aim to unravel the context-specific meaning actors within a certain environment attach to particular conception. This to gain a deeper understanding and strengthen the discussion by collectively speaking of “plausible images” and “shared meaning”. The literature provides information about decision making in general and the biases that are
encountered by decision makers. On the level of risk and its management, the literature is heavily depending on neoclassical theories of modeling and the assumption of
rationality. As theories on decision making have shown, bounded rationality is a more realistic assumption underlying managerial decision making. The literature on risk and
its management contradicts insights from decision making and behavioral theories. Therefore the meaning of risk management from the theory is a rather static one. On a general level it does provide some information about the meaning of risk management as it shows what it is decision makers have to deal with and choices they have to make. Theory however remains far from describing the contextual challenges specific markets have to deal with. Especially the alternative investment categories such as private equity and real estate lack this kind of theories. Therefore it remains unclear which phenomena are linked to risk management in the daily management practice and the connection between these phenomena in terms of hierarchy and importance. By introducing sensemaking as a process of unraveling context-specific meaning, this research aims to provide the first steps into the exploration of the meaning risk management has to decision makers within real estate. Particularly, by addressing and unraveling the phenomena that create the foundation of the conception of risk management. Further this study contributes by describing these phenomena, their bundling on a higher conceptual level and eventually by describing the hierarchical interconnectivity with each other. All this to unravel the collective perception of risk management and replace its empty conception. Within the conceptual model a visual impression of the building blocks and their interconnection is given.
The conception of risk management is at the heart of this study and has been placed central in the conceptual model for this exact reason. Decision making is the umbrella that covers all decisions. As the literature review showed, risk management covers a substantial part of decision making, but its coverage has not been framed yet. A context-specific view from the perspective of real estate decision makers could lead to such a framework and deliver a “plausible” image of its coverage. The process of sensemaking is used to extract this image. Both concepts as well as phenomena underlying risk management remain unclear at this point and have been indicated accordingly in the conceptual model. What is clear is that decision makers do make sense of their
environment in somewhat way. As the literature review on decision making has shown, multiple heuristics and biases play their part in this. The conception of risk management therefore is a result of both sensemaking as decision making. What remains unclear is the content of this conception and the importance of the individual sensitizing concepts that surround it.
Figure 1 Conceptual model
RISK MANAGEMENT
SENSITISING CONCEPT • PHENOMENON X • PHENOMENON Y • PHENOMENON Z SENSITISING CONCEPT • PHENOMENON X • PHENOMENON Y • PHENOMENON Z SENSITISING CONCEPT • PHENOMENON X • PHENOMENON Y • PHENOMENON Z SENSITISING CONCEPT • PHENOMENON X • PHENOMENON Y • PHENOMENON Z SENSITISING CONCEPT • PHENOMENON X • PHENOMENON Y • PHENOMENON Z3.
RESEARCH DESIGN
3.1 RESEARCH PHILOSOPHY
As the research philosophy contains important assumptions about the way the
researcher views the world, it seems an excellent starting point of designing a study. As Saunders et al (2009) note, awareness about the philosophical commitments stemming from the choice of research strategy is important as it has significant impact on a
researcher’s acting as well as its understanding about what it is that is researched. Saunders et al (2009) point out the crucial role of the researcher mentioning that it is the view of the researcher upon the world that leads to picking a strategy, research method and eventually sort out what is important and what is useful. Two major ways of thinking help the researcher to make a decision about the research philosophy: ontology and epistemology (Saunders et al., 2009). It depends on the research question which approach is more suitable to use. An important point made by Saunders et al (2009) is that there is no “better” approach and the distinction between ways of thinking is there to help the researcher reflect on its own thinking. So firstly, there is no preference of a philosophy at the initial stage leaving the researcher free in making a decision on which research philosophy to adopt. Secondly, it illustrates the point that a particular research question rarely falls neatly within one philosophical domain. Sensemaking is the
interpretive process that has been adopted within this study to uncover risk management phenomena and produce sensitizing concepts on the meaning of risk management. Doing this, the study heavily relies upon interpretivism and pragmatism and appears somewhere in the middle of these two research philosophies. The
consequences of the choice for a research philosophy in this direction are displayed in the following subchapters.
3.1.1 ONTOLOGY
Ontology is about the question: what assumptions do we make about the way in which the world works? It is concerned with the nature of reality and can be divided in
objectivism and subjectivism (Saunders et al., 2009). Objectivism views the existence of social entities apart from social actors. Subjectivism on the other hand holds that social phenomena are created from the perceptions and consequent actions of social actors and that these actors are concerned with the existence of social entities (Saunders et al., 2009). Subjectivism aims to understand the meanings that individuals attach to social phenomena. The process of sensemaking aims to do just that. An essential assumption within sensemaking is that meanings that derive from the interpretive process are continuous. Its aim is to extract a plausible image of the world around the actors within a certain context, stemming from what these actors explicitly make of what is happening around them. As the world is seen as unstable and frequently fluctuating, “plausibility” is the primary idea, instead of “accuracy”. This is further illustrated by visualizing the effects stemming from these ideas. Weick et al. (2012) illustrates this with an example about navigation. Mentioning that the availability of a “plausible” map is more practical to use than the absence of an “accurate” one. In other words, the underlying assumption of sensemaking is a practical one. One that aims to directly apply main ideas of a story that is known, instead of waiting to retrieve the entire story before action is undertaken. Such an assumption leads to an approach that is far from flawless, but is aware of these possible limitations. Therefore its focus is at the continuous adjusting of the story, while the actors that write down the story are operating within it.
3.1.2 EPISTEMOLOGY
Epistemology is about the question: what is acceptable knowledge in a particular field of study? As pointed out earlier, the researcher eventually decides on what is important and useful knowledge. Epistemology looks at this from the point of view of the
researcher. The example of the “resources” researcher and the “feelings” researcher ( Saunders et al, 2009) has made this distinction imaginable. With this placing
researchers either in the field of hard facts research or the research of feelings and attitudes. The research of this study is about meaning. That in itself can be viewed upon from both sides. Either as an uniform meaning or a relative one. In the first place this research addresses the relative meaning to a particular group: real estate decision makers. For that specific group it might at the same time be its “hard” meaning. The emphasis of the study is more in the direction of the relative meaning. As a result from that emphasis the research question has slightly more affinity with the “feelings”
researcher. In the search for an answer to the research question this research uses both the thoughts of decision makers (feelings) as well as factual data from the reporting practice (resources). On first side it therefore seems to have elements of both the “feelings” researcher as well as the “resources” researcher. A closer look at the risk paragraph of the reporting practice makes it more of a “feelings and attitude” research than hard facts, as reporting on this subject is all about what the decision makers
perceives as risky and worth reporting on. Therefore this research is more related to the “feelings” researcher. In addition, addressed themes in the end will be displayed as sensitizing concepts. A sensitizing concept comes into existence through conversation. As Liu (2005) mentions the distinction between definitive and sensitizing concepts is related to the nature of the subjects that are analyzed. Liu (2005) relates definitive concepts to subjects of monologue which are primarily founded within matters of natural science. At the same time Liu (2005) speaks of sensitizing concepts as subjects of dialogue and focus on matters of humanities and social sciences. This corresponds with the process of sensemaking, which is a collective social process of shared meaning through dialogue. From an epistemological perspective it therefore seems logical to add the addition “sensitizing” to the concepts that reveal from the study. This to emphasize the origination of these themes to the process of sensemaking and the conscious approval the sort of knowledge stemming from such an enquiry.
3.1.3 AXIOLOGY
Another aspect that is important in the design of a good study is axiology. Axiology is about the question: what role do our values play in our research choices? It is a branch of philosophy that studies judgments about value (Saunders et al., 2009). As this study explores the context-specific meaning of risk management by uncovering underlying phenomena, it balances somewhere between interpretivism and pragmatism. It therefore relies on the assumption that reality is relative. In other words, its meaning differs to different decision makers. With that according to Gephart (1993) the study qualifies as an interpretive study. As interpreting is all about valuing what the
researcher thinks is important, values play a major role in the study. As the research sticks to phenomenology (making sense of the world around us), values could have a significant effect on the eventual outcome. As a result research from an interpretive perspective is value bound as the researcher is part of what is being researched and cannot be separated, which results in being subjective (Saunders et al., 2009). From a pragmatism point of view, values play a large role in interpreting results as the
researcher adopts both objective and subjective points of view (Saunders et al., 2009). As the research balances somewhere in between interpretivism and pragmatism a bold statement that can be made without any doubt is the possibility that values play an important role in the study. As both the researcher as well as the decision makers are actors within real estate, they cannot be disentangled from their environment. While the notion and use of sensitizing concepts discussed within the chapter of epistemology already addressed this matter it is displayed here once again from the perspective of axiology.
3.2 RESEARCH APPROACH
Within the research approach different choices of the study are set apart. In general, there can be made a distinction between two different research directions: induction and deduction. Induction is about building theory, while deduction is about testing theory (Saunders et al., 2009). As the study focuses at making sense of the context-specific meaning risk management has to the real estate market, the study is mainly related to the inductive approach. This, as it uses phenomenology to uncover the fundamentals that are incorporated in the term risk management. Other elements
relating the research towards the induction approach are the emphasis at understanding the meanings humans attach to events and a close understanding of the research context (Saunders et al., 2009). The study qualifies as a case study as it takes the real estate market as a case. Yin (2012) adds to this that a case study is a suitable research
approach when little is known about a particular phenomenon and the study addresses the perspectives of those studied (in this case decision makers). He further mentions that focus on depth and detail and an emphasis on exploring instead of testing
contribute to the decision for a case study (Yin, 2012). That exactly is the aim of this research. Eisenhardt (1989) shows the process of inducting theory from case studies. She also shows the various aims a case study could possibly have: provide description, test theory or generate theory. Providing description is the aim of this study. According to provide description, the study uses an approach of textual analysis. This means that the researcher uses observations and written documents in order to analyze them and make sense of its content (Gephart, 1993) . Gephart (1993) bundles observation and written documents in a concept of “texts”. Further, referring that the textual approach is based on the assumption that texts have the interpretations of their creators embedded in them (Gephart, 1993). This is corresponds with the conception of “producing
meaning” mentioned by Weick (2012). A second assumption is that meaning is actually "inter-textual" (Gephart, 1993). This means that phenomena are context-dependent and their meaning stems from the way in which they are used. This implicates
interconnectedness of phenomena. This is not surprising if compared with a book for instance. It is the narrative that gives meaning to a bunch of words and eventually reveal its story. More academically defined, “inter-textual” refers to the logic behind the
construction of a given text and the process of acquiring meaning “through its
description discourse refers to conversation or a narration of events and text refers to documents. Within this study the sensemaking process relies primarily on documents. The research therefore mainly exists of textual analysis and sensemaking. Such an approach “seeks to uncover the general conventions, interests, and cultural practices that make the text meaningful” (Gephart, 1993, p1468) Gephart (1993) also provides an idea of what needs to be done to realize such an ambition mentioning “these operations involve disassembling texts and extracting key passages that reveal meaningful topics. and features of texts” (Gephart, 1993, p1468). Within the study phenomena are
extracted from the texts of questionnaire answers and annual reports. This, to reveal meaningful topics. In creating a plausible image of risk management, these phenomena are bundled to themes. From there on, the frequently mentioned themes are given a closer look and made sense of. Within qualitative research, themes normally refer to “conversation topics, vocabulary, recurring activities, meanings, feelings, or folk sayings and proverbs” (Liu, 2005, p255). Both themes as well as its underlying phenomena qualify to this reference. Eventually, it is the researcher’s interpretation where to draw this thin line. It is important to make this distinction. Liu (2005) refers to this as he mentions: “we need to distinguish between explicit themes and implicit underlying themata which generate and structures these themes, in relations to social
representations” (Liu, 2005, p256) This study adopts his stance. Risk management therefore is disentangled in sensitizing themes (Liu, 2005) which are disentangled into phenomena (Saunders, 2009). Together the bundling of a long list of phenomena reflect within sensitizing themes. Sensitizing themes, eventually reflects the different fragments of the context-specific meaning of risk management within real estate.
3.3 RESEARCH DESIGN
The research design can be seen as the blueprint of this research, setting apart the steps that will be undertaken to answer the research question. Yin (2009) distills five steps that are of particular importance in the research design of a case study: the research question; propositions (if any); the unit(s) of analysis; the logic linking the data to the propositions and the criteria for interpreting the findings. As it is the study’s aim to explore new grounds, the propositions are replaced by a stated purpose: “carving out phenomena out of the undifferentiated flux of raw experience and conceptually fixing and labeling them so that they can become the common currency for communicational exchanges” (Weick et al., 2005, p411). As indicated by Berg (2009) this stated purpose should provide guidance and a kind of operating framework for the research. As this has been established a choice on the starting point of the research can be made. Researchers are divided on where an explanatory study should start. Both research and theory have been indicated as starting points for doing research (Berg, 2009). Yin(2009) mentions the importance of theory in doing case studies and states that a theoretic starting point will bring the research to a higher level. Within this study this stance is accepted, as the literature review at the beginning of this research already revealed to the attentive reader.
Important to address is the emphasis of this qualitative research design. Where in quantitative research representation is an important goal to achieve, qualitative
research is more about replication. Yin (2009) addresses this phenomenon as he speaks about sample logic and replication logic. As replication is an important matter for a qualitative research study, the steps within the research design are set up in such a way replication is highly supported. Validity and reliability are the building blocks in this. With strength of the building, depending on the quality of each of these blocks. All to make the study as rigorous as possible.
Yin (2009) distinguishes three types of validity: construct, internal and external. Construct validity is about the extent to which a study actually investigates what it claims and in such a way that abstract phenomenon become less vaguely to measure (Yin, 2009). To create construct validity within this research, multiple sources of evidence will be used with which data triangulation becomes possible. Apart from that the supervisor of the research will review the report several times during the process of writing the research. Internal validity is about causal relations and has been appointed
by Yin (2009) specifically to explanatory research. Yin (2009) stresses the subject to a broader problem of making interferences and for that reason internal validity is
important for this exploratory research as well. Pattern matching and cross case analysis will be used within this study to contribute to a high level of internal validity. External validity is about the way findings are generalizable beyond the immediate case study (Yin, 2009). As multiple cases are taken into account within this study and those cases are selected from a group of institutional real estate investors, findings will be expected to be generalizable for the real estate decision maker in general.
With all steps to a valid study in place, advancement towards an even more important building block can be made: reliability. Reliability is extremely important, as it paves the way to a replication. Yin (2009) describes this as the objective of the researcher to make sure that another researcher would arrive at the same findings when following the steps of the research. Reliability in the case of a qualitative research is that sense is about leaving a clear map. Transparency about the research steps is therefore crucial. Within this research particular emphasis will be given to the steps taken to derive at results from the data. As it is there where interpretation differences could appear and the research is at its most vulnerable.
3.4 METHODOLOGY
This chapter describes the choices that are made on the level of methodology. A mixed method has been found appropriate to gain insight in the words and deeds of real estate decision makers. The “words” are conceptualized by the thoughts managers display within their answers on a questionnaire, while the “deeds” are explicitly written down within the risk paragraph of the annual reports of real estate funds. The use of these two methods creates the possibility to triangulate the eventual findings and search for cross-case patterns that will strengthen the exploration of this study. The chapter is divided in three subchapters that explain the set-up of the two used methods and their data
selection and gathering. The final subchapter describes the set up that has been used to triangulate and make the search for cross-case patterns structured and transparent. The data coding and transformation are also appointed in this final subchapter as this
overlays both methods for the reason of triangulation.
3.4.1 QUESTIONNAIRE
The interest of this study is unraveling the context-specific meaning risk management has to decision makers within the real estate market. Therefore decision makers are targeted directly with a questionnaire. Doing this in a distinct way, a particular questioning method is used, mainly used within social sciences. The Iowa School’s
twenty-statement-test (Berg, 2010) is a test that asks one particular question and leaves room for twenty different responses. This set up has been customized to the research purpose of this study. Within this study the twenty-statement-test is used to extract different answers from real estate decision makers to the question: “What does risk management mean/concern?” Answers of multiple decision makers might lead to comparable or differing conceptions. To be able to direct these conceptions to different decision makers, the questionnaire exists of multiple questions that reveal the
characteristics of the respondents. As the literature review already showed, those elements might explain eventual outcome differences on risk attitudes and perceptions.
3.4.2 ARCHIVAL RESEARCH
The corporate literature is accessed as a primary source of data as it explicitly indicates the collective meaning multiple decision makers have put into a narrative. The study therefore relies on a representative selection of real estate fund annual reports. As annual reports exist to report crucial information of managerial action to inform
stakeholders, they embody crucial information for the purpose of this study. Annual reports are therefore used as an archival source of information within this research. Berg (2009) mentions that archival records are those documents which are prepared for the examination by others. The availability and target audience of such records
determines whether they can be viewed as public or private records (Berg, 2009). The main reason for the existence of these annual reports is its examination by its
stakeholders. The official status of these documents and their semi-publicly availability through the reporting legislation make it an appropriate source to use. Appropriate, as it displays the communication and information that has the conscious approval of the responsible decision makers. Berg (2009) suggests that official documentary reports may offer a particular interesting source of data. A view fully subscribed within this study as it takes the annual reports as the primary source of data to make sense of and draw conclusion from.
3.4.3 TRIANGULATION
Using a questionnaire as well as archival research create the possibility of linking the two together. Possible cross-case patterns could strengthen the research results. The absence of cross-case pattern or even differences between the two methods could provide direction for future research. The possibility of linking the results of two
different methods to each other in a structured and transparent way are much improved when taken into account early in the research. Therefore the research design already mentioned this in its set up. Shortly, the measures taken into account to match the result from the mixed methods are mentioned here again. In the first place, the research design is restricted to twenty possible conceptual extraction of risk management, as the
twenty-statement-test provides only space for twenty different answers. The archival research can lead to many more possible conceptualizations. However, eventually a match between the twenty most frequently mentioned concepts can be made. Resulting in a proficient amount of conceptualizations that offer guidance in an understanding of risk management. At the same time, the coding process of both used methods plays a big part, as descriptions from the questionnaire probably differs from descriptions in semi-publicly available documentation. Matching these outcomes requires a tight and
structured regime of data interpretation on forehand. In the next chapter the steps, which are taken into account to ensure this are carefully written down.
3.4.4 DATA COLLECTION
Collecting recent annual report of real estate funds, the first step was making a list of real estate funds with a Dutch listing. Followed by accessing both corporate websites as the register of the Chamber of Commerce. This to collect the 2013 annual reports multiple real estate funds. As listed real estate funds have the obligation to make their annual reports publicly available, all 2013 annual reports of real estate funds with a listing to a Dutch stock exchange are incorporated in this study. Table 2 provides an overview of these funds.
Table 2 Overview of incorporated listed funds and their characteristics
Company/Fund name Segment Listed to Annual report 2013 IVBN Member
Beursgebouw Rotterdam Diversified NPEX Available NO
Corio Diversified Euronext
Amsterdam Available YES
Groothandelsgebouwen Diversified Euronext
Amsterdam Available NO
NSI Diversified Euronext
Amsterdam Available YES
Unibail-Rodamco Retail Euronext
Amsterdam Available YES
Vastned Retail Retail Euronext
Amsterdam Available YES
Wereldhave Diversified Euronext
Amsterdam Available YES
For non-listed funds a selection has been made prior to the collection of annual reports. Within the Netherlands institutional investors in real estate are united within the IVBN. Therefore the selection for non-listed real estate has been based upon an IVBN
membership. In total 23 institutional investors are member of the IVBN. From these 23 members however, not all are incorporated within the study. This has several reasons. Firstly not all of these funds have a significant investment focus at the Netherlands, which is needed for the purpose of the study. When they do have a significant focus at the Netherlands, not all annual reports were available. Either, because they were not entirely deposited or were unavailable. In total 14 different annual reports of non-listed funds have been incorporated within the study. Resembling 10 of the 23 members. With that resembling a representative part of the institutional members as almost half of them are incorporated within the study.
