Behavioral Economics: The Science of Risk

Kelly PetersKelly Peters | CEO | BEworks

How many people are killed by sharks? Considering the exposure shark attacks receive, you might think many more than the actual number. The gap between the real and the perceived is often wide, yet people, companies, institutions all use perception to make decisions that impact their businesses and their lives.

In her presentation at the 2016 National ALLL Conference, Kelly Peters, CEO of BEworks, a behavioral science consultancy based in Toronto, will explain how perception, or bias, comes into play when measuring and responding to risk. She will discuss the science of risk, including a look into various scientific studies, to help attendees better understand the real risks in their loan portfolios, how they empirically assess risk, and what biases could be distorting their view and keeping them from properly assessing risk.

Key Takeaways

To be a better calculator of risk:

  • Recognize bias in your thinking.
  • Optimize the process to mitigate bias.
  • Think like a scientist.

To think scientifically:

  • Gather data
  • Make predictions
  • Review how well the predictions performed
  • Carefully define key metrics
  • Encourage a culture of dissent

The psychology of risk:

We don’t always have the time or inclination to take a systematic approach to making decisions. We need to recognize how pieces of information influence us and can have an effect on our risk assessment.

We tend to believe that our beliefs are based on facts, but we have our biases and even look to sources we are biased toward for information. We ought to be going out of our way to search for information that contradicts our beliefs. A test of auditors revealed that when strategic risk summaries were positive, it biased the auditors against being able to identify red flags in financial statements.

A scientific culture provides openness to recognizing bias that you can fall prey to. The process ensures you consider all the alternative explanations to your first or own decision.

Download the full 2016 National ALLL Conference Digest.