Risk Insider: Andrew Bent

Assuming Rationality Is Probably Irrational

By: | August 29, 2016

Andrew Bent is the Manager of the Alberta Energy Regulator’s Enterprise Risk Management Team. He leads the enterprise risk practice for the AER, and supports operational risk management activities. The views expressed in this article are those of the author, and not necessarily of the employer. He can be reached at [email protected]

How often do we assume the people required to make decisions under pressure will do so logically, calmly and in a consistent way?  How often do we design critical risk controls and processes that require a rational, thinking mind to execute them?  How often do we get surprised when this doesn’t happen?

The answer: probably more often than we should.

Let’s imagine for a moment that we wanted to model the behaviour of a pinball as it rocketed around the table. In theory, you could predict how the ball would bounce off the flippers, bumpers and spinners using not much more than basic high school physics and math.

In reality, each interaction of the ball with a table component creates a dizzying array of input variables for the next interaction. We would likely throw up our hands in despair and proclaim that the movement of the ball was beyond our ability to model with any degree of certainty.

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Yet, if you watched a pinball wizard at work you would see that it is exactly their mastery of these interactions that makes them so effective – a flick here, a bump there, and the unpredictably of the balls seems to have vastly diminished.

So how does this relate to our opening questions? It comes down to our willingness to truly understand the complexity in our systems, including the effect of irrational decision making by those people we entrust with our organizational resources.   The challenge for the risk manager if they try to model irrational behaviour is often incredibly complex – far more so than the modelling of a pinball.

So what do we do? We ignore the abundance of evidence that shows people don’t always make logical decisions (or at least decisions that are logical from the organization’s point of view) and assume instead that they will.

For example, economic theory tells us that it is illogical to expand resources beyond the value of the benefit you will obtain from the use of those resources – but how many of us have spent 45 minutes on hold to argue about a $5 charge?

How many of us have an irrational fear of spiders (or swans) that drives us to make irrational decisions? All of which raises the important question: is it irrational to assume rationality in our risk management activities?

It comes down to our willingness to truly understand the complexity in our systems, including the effect of irrational decision making by those people we entrust with our organizational resources.

As risk managers it is important that we have these conversations with our organizations. While it isn’t always easy, we have an obligation to highlight all of the potential failure mechanisms that can cause harm to our organizations, our communities or our environment.

By recognizing that people can be both rational and irrational, we can help to improve the design and effectiveness of our risk treatments. Who knows – this approach may just help improve the bottom line too if it helps manage situations that have hit the up-kicker.

The views expressed in this article are those of the author, and not necessarily of their employer.

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The R&I Editorial Team can be reached at [email protected]