What cognitive biases do you need to overcome in risk management?

The phenomenon of overoptimism in risk management refers to the tendency of individuals or organisations to underestimate risks or neglect possible negative effects. It occurs when decision-makers tend to make more optimistic assumptions about future events or projects than is objectively justified. Reasons why excessive optimism can occur in risk management.

Acknowledging and reducing cognitive biases is essential for making effective decisions in the field of risk management. Overconfidence, anchoring, and confirmation bias are just a few of the biases we frequently battle with and can impair our judgment. It's critical to identify these patterns and foster a culture of cognitive diversity in risk management teams. Biases can be overcome by embracing other viewpoints and utilizing data-driven insights, which results in more thorough risk assessments. Let's go objectively and clearly across the risk landscape.

Confirmation errors in risk management must be integrated into analyses and training. The moderator must be aware of this, even if it is a challenge. It is difficult to separate them from the other phenomena mentioned here. The solution here is joint assessment, checks, reviews, second opinions or the consideration of as many perspectives as possible.

Confirmation bias is a cognitive bias that affects the way we gather and interpret information. To overcome confirmation bias, it's essential to consciously strive for objectivity and consider alternative perspectives. Here are some effective strategies: 1. Diverse Exposure: Actively seek out a wide range of opinions and information sources. 2.Critical Thinking: Develop critical thinking skills to evaluate information objectively. 3.Disconfirming Information: Be open to disconfirming evidence. 4.Devil's Advocate: Embrace the habit of arguing against your own beliefs. 5.Seek Feedback: Encourage feedback from others, especially those who hold contrasting views. 6.Awareness: Acknowledge the existence of confirmation bias.

Fixation bias in risk management refers to the phenomenon of focusing too heavily on certain information, assumptions or solutions while overlooking or failing to consider other relevant factors. This can lead to a distorted risk assessment and impair the ability to adequately identify potential risks. It is a very real problem in risk and error management. Fundamental to this is the fixation on experience, i.e. saying to yourself, hey, I already know this anyway. It's sure to be this or that again. To avoid fixing errors, it is important to consider a wide range of information and perspectives and not rely exclusively on a single source or method.

Linear Thinking is another Bias. We tend to think linearly about risk and causes, However, risks often exhibit non-linear characteristics, meaning that the relationship between cause and effect is not proportional or straightforward. In non-linear systems, small changes can lead to disproportionately large and unpredictable outcomes. This complexity can make risk management challenging, as risks may interact in unexpected ways, and the impact of events may not follow a linear trajectory. It underscores the importance of adopting flexible and adaptive risk management strategies, considering the interconnected nature of risks and the potential for nonlinear responses to various factors.

The confirmation bias in the context of risk management, where we tend to favour information that supports our existing beliefs or unconsciously favour views and biases that match our image or expectations. In practice, this means that we only see the aspects that confirm our risk strategy, our image and overlook other options. To avoid this mistake, it is important to expose ourselves to different perspectives, look for conflicting information and consider alternative conclusions. The most effective ways to do this are 2 approaches: 1. expert judgement and swarm intelligence

Hindsight bias is a psychological phenomenon that influences perception by reinforcing the belief that an event was predictable before it occurred. This belief can lead to overconfidence in the ability to predict future events and can even lead to unnecessary risks. Hindsight bias can play a negative role in decision-making by interfering with the objective evaluation of information. In investing in particular, this bias can lead to feelings of frustration or regret after the fact if one has not reacted in time to an event that has affected the market. It is important to be aware of this tendency in order to make informed decisions that are less influenced by retrospective assumptions

In order to avoid availability bias it is necessary to involve people from varied backgrounds. That is easier to achieve when working in bigger companies, though not impossible on smaller ones.

Cognitive biases persist in risk teams lacking diversity and varied perspectives. These biases can be overcome by forming diverse teams and encouraging multiple viewpoints. Success hinges on support, nurturing and creating an inclusive environment where every voice is valued. Continuous training, open communication, and mutual respect are essential. Empowered team members offer unique insights that foster innovation, leading to early risk detection, increased resilience, and improved risk mitigation strategies.

Human decisions are strongly influenced by fear. It's hard wired. Uncertainty, risks, trigger fear and we strive to reduce uncertainty. Biases are an important mechanism to enable us to reduce uncertainty. We will endeavour to reduce what scares us. On a continuous basis we are presented with a overwhelming amount of information. Biases help us make decisions. Biases can lead to wrong decisions. To effectively manage risk we must collectively and individually recognize and acknowledge our fears and biases.

One critical bias is the "availability heuristic/bias" where the likelihood of a risk is overestimated based on how easily instances of it can be recalled. Overcoming this bias involves utilizing comprehensive data and not solely relying on memorable events. Another crucial bias is "confirmation bias," which involves seeking out and favoring information that confirms preexisting beliefs about risks, potentially leading to overlooking contrary evidence. Mitigating this bias requires actively seeking diverse perspectives and considering alternative viewpoints. Additionally "optimism bias" can impact risk assessments by leading to an underestimation of potential negative outcomes. Overcoming this bias involves incorporating realistic scenarios

I would like to briefly discuss two key distortions and phenomena in risk management. The "turkey illusion" teaches us that even experts are completely incapable of predicting crises. On the first day of its life, the turkey is confronted with a man who could kill it. Instead, he feeds him - as he does the next day, the day after that, and so on and so forth. From the turkey's point of view, the likelihood of the man killing the turkey becomes less and less every day. But then comes Thanksgiving. In other words, an unknown risk is incalculable. The second example is the Hawthorne Effect. Its relevant because it suggests that awareness of observation can influence behaviour and performance, which should be taken into account when planning RM

Management always used new products success rate to compare with the mature products i.e. NPA of new product against old product. This kind of matrix creates misconceptions of superiority of the current managers performance. Product performance need to compare like for like.