Risk Management

The Psychology of Risk and How It Affects Business

Organizational risk, project risk, and personal risk are all different things, but the human brain addresses each of them from the same starting point. There is a genuine psychology to risk, and considerable effort has been put into studying it. In an article for Risk Management magazine, Katherine Heires discusses the psychology of risk and some takeaways to remember moving forward.

Planning for Crisis

From financial disasters to natural catastrophes, people’s inability to properly weigh risks or handle crises that have struck has resulted in worse damage than necessary. Fortunately, the best defense against human error with risk is straightforward: “pre-crisis training.” Much like fire drills in school, pre-crisis training enables employees to commit to “muscle memory” the behaviors that are needed to behave well during a business crisis. Training will likely be most effective in the form of a game or a simulation of some kind.

Without such training, people default to traditional fight-or-flight attitudes with how they perceive risk. Yet interestingly—and as is noted by a professor in the article—risk is ultimately just a construction of the human mind, the existence of which is intended to keep us from suffering harm. But there is also risk in allowing your brain to manage risks on autopilot:

Risky situations and crisis events can produce a range of negative stress responses. One example of this is “cognitive lock-in,” the tendency to stick with one’s first decision, even in the face of new information that suggests a wiser or better course. Another response is what some experts call “task saturation,” wherein people lose sight of the big picture and only focus on small or less important problems. Risk can also cause individuals to succumb to “groupthink,” which allows them to be unduly influenced by the thinking of a group and make potentially irrational decisions based on consensus rather than objectivity.

For a longer discussion and several examples of organizational risk management in action, you can view the original article here: http://www.rmmagazine.com/2017/09/01/the-psychology-of-risk/

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