Risk Management and Decision Making

We are a management consultancy that specialises in helping clients understand risk and uncertainty and how it might affect their decisions.

To help people make better informed decisions we must first accept a hard truth: as humans we are inherently flawed at making accurate forecasts. This might sound strange considering that the average adult is estimated to make 2,000 decisions every waking second. Fortunately, most of these decisions are trivial or handled subconsciously – the brain is smart.

But is the brain always smart?

One tool in our cognitive armoury to help us make conscious decisions under uncertain conditions is Heuristics. These can help us arrive at decisions faster when we might not have the time or resources to adequately compare all possible, competing information before making a choice.

These mental shortcuts can be helpful for most of our conscious decisions, but unfortunately when it comes to making big estimates or forecasts, like how much will it cost to build first of class warships or how long it will take to decommission a nuclear facility, these mental shortcuts can be unhelpful. We are forced to contend with a panoply of irrational devices that work in direct opposition to our logical decision-making functions: cognitive biases.

Sometimes the brain can be anti-smart.

Common cognitive biases and behaviours that we often see when we help our clients to estimate the cost or schedule implications of a major decision, include:

Affect – Involuntary response to stimulus. If we have pleasant feelings about something we see the benefits as high and the risk as low, and vice versa.

Anchoring – Conclusion is based on a piece of information obtained early in the process. This information may later prove to be inaccurate.

Availability – Reliance upon immediate examples which leads to overestimating the probability of similar things occurring in the future.

Confirmation – Seeking information to support an existing point of view whilst avoiding information that contradicts it.

Groupthink – The groups desire for harmony/conformity leads to dysfunctional decision making outcomes.

Moses factor – Similar to groupthink, the groups desire for harmony outweighs the individuals opinion.

Uncertainty Avoidance – The groups tolerance of uncertainty is reflected in the extent to which group members attempt to cope with anxiety by minimising uncertainty. This can drive improvement in risk activities if the group are comfortable with uncertainty.

As experienced risk practitioners it is essential that we have an awareness of all the factors that can influence decision making – after all, the discipline of ‘risk management’ is rooted in decision science and human behaviour.

We have been doing this long enough now to be able to spot these biases when they arise during client engagements, in truth this isn’t all that hard. What sets us apart as trusted advisors, is that we also understand how these biases might affect the accuracy of our clients’ forecasts and we have the practical ability to alleviate their impacts, through mathematical modelling, to ultimately improve decision accuracy.

And it’s not just in the modelling space where this comes in handy. Understanding human decision-making behaviour allows us to facilitate constructive, engaged, and informed discussions about risk and uncertainty that generates genuinely useful information and helps our clients gain lasting benefit from the understanding that risk exists as a range of possible outcomes.

As risk consultants, we add value by helping organisations understand and respond to a range of possible outcomes.

How often have you participated in a risk review or workshop and observed these cognitive biases and behaviours? How do you manage them to facilitate effective risk management discussion? And what techniques do you employ in your risk modelling activities to counter the effect of cognitive biases on your estimates?

Join in the conversation at www.redstonerisk.com

Nina Johnson

Nina is an experienced risk management and business continuity professional, who delivers high quality results under pressure. She has strong analytical skills (including QRA practitioner) and a commercial focus to build capability, drive performance, develop solutions, and inform decision making.