If you want to be a realist, start by being a pessimist. It sounds miserable, but the psychological evidence is compelling. Most people suffer from optimism bias, and many of the rest are labelled as ‘depressed’. In short, happy and well-adjusted people generally tend to overestimate how long they will live and how successful they will be. Do not blame me for being a sourpuss – this is scientific fact, not just my contrarian nature (though perhaps I know these facts because I systematically went out and looked for evidence to support by contrarian beliefs…)
Given that most firms start with the most primitive form of risk management, which basically means just asking people what they think about risk, then you have to marvel at how the inherent problem of bias is so utterly overlooked. After all, it is called ‘risk management’ not ‘wishful thinking management’. We already know (or we should know) that if you ask people about risk, they will give you a biased answer. So how should we address this problem? In this brilliant article, Denise Tessier of Wolters Kluwer Financial Services walks through the strategies for minimizing bias in risk assessments. She gives good and straightforward advice that is well worth following. As Denise cogently observes in her conclusion:
ERM practitioners must appreciate that all human input into a risk study is subject to bias, and adopt appropriate mitigation techniques to ensure a clear, sharp view of the future.