Risk Intelligence III

Risk Intelligence Definition: A general mental capability that, among other things, involves the ability to reason, plan, solve problems, think abstractly, comprehend complex ideas, learn quickly and learn from experience in matters involving risk and uncertainty. It is not merely book learning, nor is it primarily about a gut feel for risk. Rather, it reflects a broader and deeper capability for comprehending risk and uncertainty in our surroundings—”catching on,” “making sense” of things, or “figuring out” what to do in the face of both presenting and emerging risks.*

In an earlier post, RISKVIEWS told of the capabilities of the Risk Intelligent.  To acquire capabilities, one must start with beliefs that (a) there is a need for such capabilities and (b) that such capabilities can be effective in satisfying the need. Common Beliefs of the Risk Intelligent that led them to acquire their capabilities:

• The world is dangerous enough that we are motivated to control risks, and also predictable enough that systematic management and exploitation of risk can be worthwhile.
• The characteristics of risks will drift over time (and occasionally jump unexpectedly) requiring constant vigilance to adapt risk exploitation and management processes.
• Preferences for risk and reward are asymmetrical: the aversion to a large potential loss is always higher than the preference for the same sized potential gain
• Opportunities for profit via risk-taking exist because firms can find opportunities to exploit risks that the market has miss-priced, and/or opportunities to exploit diversification effects
• It is bad for organizations to fail, so risk management objectives should be a part of all company strategies and should involve the company’s CEO and board of directors
• Risks can and should be measured; this measurement is a technical exercise that requires expertise
• Management of risk requires diligent attention to any choices to accept risks and actions to mitigate or transfer risk; more significant risk decisions should be approved at more senior levels of the company hierarchy

These beliefs differ from standard economics beliefs.

As RISKVIEWS said in another post, the capabilities are gained via Education, Experience and Analysis.  The next several posts on this topic will explore each of those paths separately.  After that, RISKVIEWS will come back to the beliefs and discuss how they come about.

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*It turns out that there are almost as many definitions of intelligence as there are psychologists.  But on one day in 1994, almost 50 agreed with this definition, put forward by Linda Gottfredson:

Intelligence: A very general mental capability that, among other things, involves the ability to reason, plan, solve problems, think abstractly, comprehend complex ideas, learn quickly and learn from experience. It is not merely book learning, a narrow academic skill, or test-taking smarts. Rather, it reflects a broader and deeper capability for comprehending our surroundings—”catching on,” “making sense” of things, or “figuring out” what to do.

As you can see, RISKVIEWS based our definition of Risk Intelligence on this wording.

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Risk Intelligence IV

Overcoming Biases

In a recent post, RISKVIEWS proposed that Risk Intelligence would overcome biases.  Here are some specifics…

• Anchoring – too much reliance on first experience
• Availability – overestimate likelihood of events that readily come to mind
• Confirmation Bias – look for information that confirms bias
• Endowment effect – overvalue what you already have
• Framing effect – conclusion depends on how the question is phrased
• Gambler’s Fallacy – Belief that future probabilities are impacted by past experience – reversion to mean
• Hindsight bias – things seem to be predictable after they happen
• Illusion of control – overestimate degree of control over events
• Overconfidence – believe own answers are more correct
• Status Quo bias – Expect things to stay the same
• Survivorship bias – only look at the people who finished a process, not all who started
• Ostrich Effect – Ignore negative information

Each of Education, Experience and Analysis should reduce all of these.

Experience should provide the feedback that most of these ideas are simply wrong.  The original work that started to identify these biases followed the standard psychology approach of excluding anyone with experience and would also prohibit anyone from trying any of the questions a second time.  So learning to identify and avoid these biases through experience has had limited testing.

Education for a risk manager should simply mention all of these biases directly and their adverse consequences.  Many risk managers receiving that education will ever after seek to avoid making those mistakes.

But some will be blinded by the perceptual biases and therefore resist abandoning their gut feel that actually follows the biases.

Analysis may provide the information to convince  some of these remaining holdouts.  Analysis, if done correctly, will follow the logic of economic rationality which is the metric that we used to identify the wrong decisions that were eventually aggregated as biases.

So there may still be some people who even in the face of:

• Experience of less than optimal outcomes
• Education that provides discussion and examples of the adverse impact of decision-making based upon the biases.
• Analysis that provides numerical back-up for unbiased decision making

Will still want to trust their own gut to make decisions regarding risk.

You can probably weed out those folks in hiring.

2019 Most Dangerous Risks

For 2019, a new poll on 180 insurance executives ranks four out of five of last year’s top risks again in the top 5.

See more details at https://blog.willis.com/2019/02/2019-most-dangerous-risks-to-insurers/