Risk Perceptions and Bias
The diagram above shows the Risk Management Process from ISO 31000:2018 Risk Management – Guidelines (Guideline). This sets out a method for managing risks. This ISO 31000:2018 Guideline is recommended for anybody interested in risk management.
Every part of the Risk Management Process involves people. People with different backgrounds, experience, personalities, abilities, attitudes, training, behaviours, strengths and weaknesses. All of these affect the way people think and make decisions.
This diversity can (and should) be harnessed to generate different and valuable perspectives for the identification and assessment of risks. However, at the same time, there needs to be awareness of ‘risk perception’, and ‘heuristics and bias’ to better understand these human aspects that are at play during the Risk Management Process.
Risk Perception
Risk perception is personal. Some people are naturally more or less risk averse. People that have personally experienced one or more specific type of significant risk event may be prone to over-estimating its likelihood, but conversely may have more insight on how the event(s) occurred and the types and levels of its impacts.
Risk perception is also affected by emotion. Risks that have a high ‘dread’ factor, such as shark attack, are prone to over-estimation of likelihood.
Differences in risk perception are the norm. When there are significant differences of opinion, people should be asked why they have their views.
Another aspect of risk perception is how people perceive probabilities when discussed in numerical terms. The table below describes various ways that probability can be expressed numerically.
Also, studies have shown that people are better at estimating probabilities such as 45% to 55%, than the more extreme ends of the spectrum.
Heuristics and Bias
When people are asked to assess risk, particularly when there is little scientific data, they process information using various ‘rules of thumb’ (called heuristics). Hillson & Hullet (2004)2 describe heuristics as “….. internal frames of reference used by individuals and groups to inform judgement when no firm data are available.”
Simola et al (2005)3 says as these rules of thumb “…are at best only approximate procedures, they can lead to predictable errors.” These errors are called ‘biases’.
Simola et al (2005) categorises these as:
Cognitive biases
Structural biases
Motivational biases and
Background biases
Types of Cognitive Biases include:
Availability: The ease with which relevant information is recalled.
Representativeness: When an individual systematically relies on a small sample of information to make judgments, erroneously assuming that the information is representative of the whole population of events.
Lack of capability to deal with some statistical concepts.
The illusion of control (or “The Halo Effect”: Where people perceive less risk because they over-estimate the ability to control it.
Structural biases arise in the situation where individuals are unduly influenced by the manner a problem has been structured as it is presented to them. The most common structural biases are ‘framing’ and ‘anchoring and adjustment’.
The manner in which a potential risk has been structured (e.g. described / explained) is also referred to as ‘framing’. For example, questions that phrased differently &/or how and what data is provided, can lead to radically different outcomes. For an excellent example, watch this YouTube clip from “Yes, Prime Minister”, the classic UK comedy.
‘Anchoring and adjustment’ is where people are asked to provide an estimate and are given an initial value, they will tend to adjust their answer towards this initial value. For example, if people are asked “The biggest loss we’ve had from this type of risk event is $250,000. So, for this risk, what level of impact do you think there could be?”, people will tend to answer around the value stated.
Motivational biases cover behaviours that will benefit (or avoid negative consequences) for the individual. Some examples include:
Managers may not want to acknowledge that they could ever incur large risk loss events as it would reflect poorly on their controls and risk management practices
An expert may conceal the full extent of the uncertainty that they feel, because they presume that someone in their position is expected to know this, with a high degree of certainty
People may have an incentive to understate potential losses in order to achieve incentives / bonuses.
People may be swayed by the opinions of people who influence their careers, especially if they can see that their opinions diverge
People may not voice their opinions that differ from those of other people who are confident, articulate and authoritative.
The types of Background biases that can manifest include ‘experience’ and ‘beliefs’.
‘Experience bias’ is where people tend to make judgments and decisions based purely on their own experience and fail to (or dismiss, or minimise) consider outcomes that are beyond their own experience.
‘Belief bias’ is where there is a bias to accept the arguments that result in the conclusions, they believe to be true. In extreme cases, belief bias can make people’s own beliefs unmovable even to rationale argument and evidence. It can also lead to people only considering (including) data that conforms to their belief and excluding conflicting data.
It is entirely natural that our experiences and beliefs affect our judgments and decisions. The danger of background biases is when other possibilities are dismissed or minimised.
References
1. Pidgeon N, Hood C, Jones D, Turner B & Gibson R, 1992, ‘Risk perception’, Risk Analysis, Perception and Management, Report of a Royal Society Study Group, London, ch. 5.
2. Hillson, D. and Hullet, D., ‘Assessing Risk Probability: Alternative Approaches’. 2004, Proceedings of PMI Global Congress 2004 EMEA, Prague, Czech Republic.
3. Simola, K; Mengolini, A; Bolado-Lavin, R. ‘Formal Expert Judgement: An Overview’. July 2005, European Commission. Directorate-General Joint Research Centre (DG JRC)
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