Unit 4: Risk Perception and Human Behaviour

Question 1

Why must an organisation take risks if it is to achieve any significant objective?

Answer 1

Appropriate risk taking requires the optimisation of opportunities and threats ( Murray-Webster and Hilson, 2008).

Question 2

What are the basic risk attitudes according to Murray-Webster and Hilson?

Answer 2

• Risk Averse
• Risk Seeking
• Risk Tolerant
• Risk Neutral

Question 3

According to Murray-Webster and Hilson what potential influences on risk perception and attitude are there?

Answer 3

• Conscious factors - e.g. the familiarity of an employee with a certain type of risk: a bomb squad police officer may become more tolerant to an inherently high risk as he or she becomes more familiar with disarming bombs.
• Subconscious factors - which can be divided into heuristic sub factors (e.g intuition) and cognitive bias sub-factors (e.g repetition bias). In the first case, intuition may be used to cut down on the time and cost required by a proper risk assessment. In the second case, an employee may give undue importance to repeated data.
• Affective factors (emotions and feelings) for example, it has been shown that if an employee is involved in a near accident while driving to attend a risk assessment workshop, that employee is likely to be more risk averse during the workshop than would normally be the case.

Question 4

What factors influencing risk perceptions does Ollson identify in his book Risk Management in Emerging Markets (2002)?

Answer 4

• Experience - the more experience you have, the more you are likely to understand what could happen and what impact it might have.
• Knowledge - better technical knowledge helps the understanding of actual and potential risks and how controls may or may not reduce probability or impact.
• Culture - behaviour is strongly influence by culture at all levels not just within a company or unit.
• Position- the level you are in an organisation can influence your decision making.
• Financial status - the more a decision could influence your own income, and how much that could impact your own finances can influence decisions.
• Ability to influence the outcome - people may under or over estimate their influence (over confidence)
• Asymmetry - individuals perceptions of downside risks are different to how they view upside risks and the tendency is to be more risk averse where there is a possibility of a loss.
• Complacency- this was an issue in the run up to the financial crisis due to benign conditions.
• Inadequate time horizons - again, in the run up to the financial crisis, focus on the short term was an issue
• Rose tinted glasses - covered in cognitive biases
• Single mindedness - it’s not uncommon to see people so focused they fail to see alternate possible outcomes.

Question 5

How can Kodak be used as an example of groupthink?

Answer 5

Hindson (2012) wrote an interesting paper on the impact of groupthink and risk culture on the demise of Kodak, in which he concluded that management focus on efficiency of existing processes left the company inflexible and incapable of adapting to a post-digital age.

Question 6

Describe the ‘Six As’ model developed by Murray-Webster and Hilson.

Answer 6

The Six As model helps better manage group risk attitude in the widest array of important and risky decision making situations.

The As stand for:
• Awareness of self and others
• Appreciation of self and others
• Assessment to determine whether intervention on group risk attitude is required 
If intervention is required:
• Assertion of needs and issues
• Action to achieve goals and intentions 
If intervention is not required:
• acceptance of group risk attitude 

(Murray-Webster and Hilson, 2008)

Question 7

How can human behaviour risk be managed?

Answer 7

Human behaviour risk is one aspect of people risk within the broader category of operational risk, which covers also process and systems risk. Chapman (2011) explains the different facets of this risk and various means of managing people risk, from human resource practices to contracts to whistleblowing mechanisms.

Key tools that can be used to influence behaviours in that regard are the annual performance management process and reward schemes - a focus of regulators in the banking sector for instance.

Question 8

What are the barriers that need to be overcome if group risk attitude is to be managed effectively?

Answer 8

From Murray-Webster and Hilson (2008)

Typical barriers to managing group risk attitude include: 
• inappropriate alignment 
• wrongly perceived assertion 
• the lone voice
• contributing v facilitating 
• unsuccessful interventions 
• Cross-cultural implications 
• corporate habits