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

Experts generally agree that risk-taking is necessary for progress and innovation, however, the current research finds that consumers penalize nonprofit organizations for taking risks. Five studies document that people judge nonprofit organizations, relative to for-profit organizations, more negatively for choosing high-risk ventures even when the risks are linked to high expected returns. Process evidence shows that these patterns occur because nonprofit organizations are viewed as existing in a moral domain, rendering their decision to take risks as morally questionable; by contrast, risk-taking by for-profit companies is not similarly viewed as morally problematic. 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, individuals are less likely to financially support nonprofits, but not for-profits, after they choose risky ventures. These findings demonstrate that people exhibit different risk tolerances for nonprofit versus for-profit companies in ways that can limit innovation and growth in charitable and other morally-relevant domains.