Behavioral Economics: The Science of Risk
The gap between the real and the perceived is often wide, yet people, companies and institutions all use perception to make decisions that impact their businesses and their lives. At the National ALLL Conference Keynote Speaker Kelly Peters, CEO of BEworks, discussed the science of risk. Here are some of her key thoughts on risk and how we assess risk.
The psychology of risk
We don’t always have the time or inclination to take a systematic approach to making decisions. We need to recognize how pieces of information influence us and can have an effect on our risk assessment.
We tend to believe that our beliefs are based on facts, but we have our biases and even look to sources we are biased toward for information. We ought to be going out of our way to search for information that contradicts our beliefs. A test of auditors revealed that when strategic risk summaries were positive, it biased the auditors against being able to identify red flags in financial statements.
A scientific culture provides openness to recognizing bias that you can fall prey to. The process ensures you consider all the alternative explanations to your first or
Key takeaways for processing risk in a financial institution
To be a better calculator of risk:
- Recognize bias in your thinking.
- Optimize the process to mitigate bias.
- Think like a scientist.
To think scientifically:
- Gather data
- Make predictions
- Review how well the predictions performed
- Carefully define key metrics
- Encourage a culture of dissent
View Kelly’s MST Talk video as she discusses bias, risk and decision making.