Risky Business: The Risk-Reward Trade-off is Different for Nonprofit and For-profit Firms

Abstract

Experts generally agree that risk-taking is necessary for progress and innovation, however, the current research finds that consumers penalize nonprofits for taking risks. Five studies document that consumers judge nonprofit, relative to for-profit, firms more negatively for choosing high-risk ventures even when the risks are linked with high expected returns. Process evidence shows that these patterns occur because consumers view nonprofits as existing in a moral domain, rendering the decision to take risks as morally questionable; by contrast, risk-taking by for-profit companies is not viewed as morally problematic to the same degree. Follow-up studies demonstrate important implications for these findings, including that when for-profit companies operate in a moral domain, they too are penalized for risk-taking. In addition, consumers show a greater decrease in likelihood of financially supporting nonprofits than for-profits after they choose similarly risky ventures. These findings demonstrate that consumers exhibit different risk tolerances for nonprofit versus for-profit firms in ways that can limit innovation and growth in charitable and other morally relevant domains.