Bias in Risk Assessment

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.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.