Governance
September 7, 2018Blockchain
September 7, 2018Risk assessments – are you taking mental shortcuts?
Summary:
A guide to understanding mental shortcuts that can prevent us from making rational choices.
ARTICLE:
In the current Aged and Community Sector environment, it is becoming more important to shine a spotlight on Risk Management. This article provides you with a guide* to grasping the mental processes we use when assessing risk.
A successful Risk Management strategy is more than paying a consultant to deliver a risk report that ends up in the filing cabinet, or purchasing complicated software that hides in the app folder. True Risk Management means understanding human behaviour.
Research shows that, when assessing risks, our brains take mental shortcuts that can prevent us from making rational choices. Do you fall for these cognitive biases when assessing risk?
| Failure to estimate | ||
| Bias | Explanation | Example |
| Confirmation bias | Focusing only on information that confirms existing preconceptions | We surveyed lots of relatives and most said there is no issue. |
| Belief bias | Basing an argument on the believability of the conclusion | I don’t understand what you said, but the conclusion seems about right. |
| Clustering illusion | Overestimating the importance of small clusters of patterns | That happened last week as well, therefore there must be a problem. |
| Availability heuristic | Overestimating the likelihood of events | I saw something similar to this on LinkedIn. We need to take it seriously. |
| Risk compensation | Taking bigger risks when there is a perception of increased safety; being more careful when perceived risk increases | Now that we have the new equipment, we can cut back on maintenance. |
| Gambler’s fallacy | Believing that future probabilities are altered by past events | That happened three times last month, so it’s pretty unlikely it will happen again. |
| Short-termism | ||
| Bias | Explanation | Example |
| Anchoring effect | Relying too much on initial information | First test seemed OK. Do we need to look any more? |
| Illusion of validity | Overestimating the likelihood of events | That worked fine at the other facility, it should work fine here. |
| Status quo bias | Preferring the current state of affairs over change | If it ain’t broke, don’t fix it. |
| Social | ||
| Bias | Explanation | Example |
| Courtesy bias | Giving an opinion or conclusion to avoid causing upset or offence | The last time we discussed this, the meeting lasted for hours. Let’s move on. |
| Blind spot bias | Viewing oneself as less biased than others | Let’s ignore Mary’s views on this one. She’s biased. |
| Bandwagon effect | Belief based on the number of people who share that belief | The whole department knows there’s no problem here. |
| Stereotyping | Assuming a person’s characteristics because they are in a group | Sue from nursing is worried, but frankly the nurses are always pessimistic. |
| Reactive devaluation | Devaluing an idea because it came from an opponent | Our competitors are only doing well because their prices are cheaper. |
| Financial | ||
| Bias | Explanation | Example |
| Endowment effect | Irrationally overvaluing something you own regardless of its objective market value | I know it will cost a fortune to fix, but it cost us $25,000. We can’t just throw it away. |
| Post-purchase rationalisation | Persuading yourself that a purchase was the right decision | We made a good call on that one. |
| Hyperbolic discounting | Preferring a smaller, sooner payoff over a larger, later reward | Let’s just get the deal done ASAP. |
| Ostrich effect | Avoiding negative financial information by pretending it doesn’t exist | Looks like we’ve run out of time to discuss this. |
It is not just other people who are subject to these mental glitches (see “Blind Spot Bias”!). So what can you do about it?
- Be aware of these mind tricks – consider pausing and taking a step back when assessing risks at your organisation. Take time to test the assessment against the biases.
- Implement a digital risk system that objectively and rationally helps risk assessment by automatically applying logical rules.
- Ensure that your risk processes are an integral part of your overall Governance structure, not just patched-on afterthoughts or software platforms that can be dismissed.
*Adapted from Tversky, A. & Kahneman, D. (1974) Judgment Under Uncertainty: Heuristics and Biases. Science, New Series, Vol. 185, No. 4157. (Sep. 27, 1974), pp. 1124-1131.
This article was originally published in the Australian Ageing Agenda online magazine 22 August 2018.
