The Cognitive Biases Hurting Risk Management

Recognizing your cognitive biases (confirmation, availability, etc.) is the first step toward sidelining them and making better decisions.

Woman Talking to Her Clients

While traditional methods of risk management have served well, there is an increasing need for innovation, driven by a deeper understanding of employees along with the advent of new technologies. 

A significant factor that often goes unnoticed in decision-making is the influence of biases. Our brains, unlike computers, use mental shortcuts to make decisions quickly. This is advantageous for efficiency but can lead to skewed perceptions and choices. 

Some common biases in risk management can include confirmation bias: seeking information that aligns with pre-existing beliefs, often reinforced by what we choose to consume and see daily. Availability bias: relying on immediate, easily accessible information, leading to a narrow view of options. Hindsight bias: overestimating our ability to have predicted past events. Negativity bias: giving more weight to negative information or outcomes. Anchoring bias: relying too heavily on the first piece of information encountered. Lastly, sunk cost fallacy: continuing investment in a failing product due to past investment.

Recognizing these biases is the first step toward understanding their impact, enabling more balanced and strategic decisions. 

See also: Building an Effective Risk Culture

Peter Hollins, in “The Art of Strategic Decision Making,” suggests simplifying complex decisions. This involves understanding transaction costs and managing decision fatigue. Effective strategies tend to include making decisions when fresh and rested and delegating or simplifying minor decisions. Additionally, it’s important to allow ample time for important decisions. 

Often, a reliance on luck or superstition is the default method. However, as amusing as that practice might be, it is not a substitute for a well-thought-out strategy. Effective risk management is about applying solid principles and strategies, not leaving things to chance. 

A pros and cons list is useful. By assigning a value to each pro and con based on personal or organizational priorities, we can quantitatively evaluate the weight of each factor in a more structured and less-biased way. If you want to overcome bias and make your list more realistic, you will add a third choice, as many risk decisions aren’t black and white.  

The most successful companies practice fanatic discipline and maintain consistency in actions, values and long-term goals. These companies also rely on realistic evidence rather than opinion or whim. Productivity paranoia is used to prepare for the worst and maintain vigilance even in good times. Another effective strategy is SMAC (specific, methodical and consistent) practices. 

The landscape of risk management is evolving, and so must the approaches to decision-making. By understanding and mitigating biases, simplifying the decision-making process and learning from successful companies, businesses can navigate the complexities of today’s environment more effectively. Taking an innovative approach to risk management not only enhances the decision-making process but also prepares organizations for a future where uncertainty is the only certainty.

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