Enterprise Risk Management, 2nd Edition

CHAPTER 17Cognitive Bias: A Practical Approach

 

ROB QUAIL, BASc

Principal, Robert Quail Consulting

 

INTRODUCTION

Cognitive bias has been defined as the set of natural human tendencies where “individuals draw inferences or adopt beliefs where the evidence for doing so in a logically sound manner is either insufficient or absent” (Haselton, Nettle, and Andrews 2005).

Enterprise risk management (ERM) is about uncertainty; it operates at the intersection between the objective (data and facts about the past and the present) and the subjective (projections about the future). It relies heavily on the judgments of experts and decision makers and, as such, it is fertile ground for cognitive bias.

Every risk manager should be conscious of the potential for their ERM activities to fail to overcome—or worse, to actively perpetuate—cognitive biases among decision makers, such as the reinforcement of unchallenged beliefs, the perpetuation of myths about the organization, and the reinforcement of social biases that can get in the way of effective decision making. And because many cognitive biases are systemic, increasing sample sizes by involving more people in a risk assessment does not necessarily reduce the impact of these biases. In fact, this may unjustifiably increase confidence in an incorrect, biased conclusion; just because two or more people have come to the same conclusion about a risk or decision does not necessarily reduce the chance that the assessment is unduly influenced ...