Our judgements are clouded by prejudices and misconceptions.

Our judgements are clouded by prejudices and misconceptions.

Feb 22nd, 2012

Our judgements are clouded by prejudices and misconceptions. Indeed, we humans often assess the probability of an event by asking ourselves if there are “cognitively available” examples. Those are readily available through memory as Kahneman (Nobel Prize in Economics) and Tversky demonstrated in a series of papers published between 1971 and 1984. Among those papers the most popular is likely the one entitled “Prospect Theory”,1979 quoted at page 212 in our book.

Our judgements are clouded by prejudices and misconceptions.

Availability heuristic

The phenomenon highlighted by Kahneman and Tversky is the “availability heuristic”. It is one of the very well know cognitive biases that plague us Humans when we are confronted with decisions under uncertainty.

That’s most likely why the 2008 recession was considered unheard of, a Black Swan. Just because most people did not remember or were not even born in 1929! The Black Swan “fad”, as we have demonstrated in earlier blog posts is indeed based on Humans having “short memory” and considering the last events as “unique”.

Sometimes we have to use availability heuristics because available data are indeed very scarce and too recent. However reliable statistical evidence will systematically outperform “intuition” when “looking backwards” in time to past events.

Looking backwards, however, is not enough. Actually it is critically limiting and incomplete, when we need to manage risks of corporations and projects. A good risk assessment has to be “looking forward”. It should examine “classic” scenarios and hypothetical ones to support management decisions. Those include those have not yet occurred, or not yet occurred with larger magnitudes.

Heat maps bear staggering intrinsic conceptual errors

Over the last five decades or so the risk management community has settled on representing the results of Risk Assessments with Probability Impact Graphs (PIGs), risk matrices, “Heat Maps”, which have a number of staggering intrinsic conceptual errors, with potential dramatic consequences on their users. Voices raise in various parts of the world to discuss these fallacies, but they remain for the great par unheard.

Kahneman and Tversky explored ways we, Humans, have found to introduce irrelevant criteria in decision-making.

Among these:

  • The continued “main stream” reliance in using inappropriate techniques like PIGs risk matrix, and
  • getting satisfaction from their results, or,
  • using intuition to correct PIGs’ evident fallacies.

As a matter of fact Kahneman and Tversky have explored in detail how human judgement is distorted when making decisions under uncertainty. Humans tend to be risk-averse. When facing the prospect of a gain, and paradoxically risk-prone when facing the prospect of a loss. That is true even if the loss is almost certain to occur! So, using improper methods like PIGs risk matrix which almost surely will lead to confusion, losses, poor planning sits well with “main stream” human nature.

Where do we go now?

So, “now that we know that we do not know how to know better”, what should we do? The idea is to build a rational prioritization on top of existing PIGs risk matrix. That’s a clear winner as it does not waste prior efforts. By deploying rational prioritization we give a rest to our scientifically proven fallacious intuition. We also allow our rational ego to make better informed solutions! Do not be “main stream”. Belong instead to the small elite that adheres to stricter cognitive standards and make you industry thrive and prosper.

We will soon publish a post explaining how you can do that.

Tagged with: , , , , , , , , ,

Category: Crisis management, Risk analysis, Risk management

Leave a Reply

Your email address will not be published. Required fields are marked *

Riskope Blog latests posts

  • Convergent quantitative Entreprise Risk Management on Divergent Risks
  • 1-12-2021
  • Convergent quantitative Enterprise Risk Management on Divergent Risks is an extension of our recent discussion on business interruption risk profiles.…
  • Read More
  • Business interruption risk profiles
  • 24-11-2021
  • Riskope’s ORE deployments generally include quantitative convergent business interruption risk profiles. These are based on “as usual” and, very importantly,…
  • Read More
  • Pit failure at Codelco Ministro Hayes in Chile
  • 17-11-2021
  • We read about the recent pit failure at Codelco Ministro Hayes in Chile. We have also read that there will…
  • Read More
  • Get in Touch
  • Learn more about our services by contacting us today
  • t +1 604-341-4485
  • +39 347-700-7420

Hosted and powered by WR London.