Risk assessment and financial decisions are affected by cognitive biases
Cognitive biases are unconscious deviations of our reasoning and judgment.
They can also heavely impact our performance: better-than-average effect among traders leads to 21% more trades, higher transaction costs and no significantly higher returns. Disposition effect makes investors keep a losing stock on average 10 days more than a winning one.
Biases result from our personal past experiences, from our corporate culture and from our immediate environment – for instance, the fact to be influenced by decisions of other investors internally or externally (herding effect), to sell winning assets too early and loosing ones too late (disposition effect) or to think systematically that our individual or collective performance is better than the one of other professionals (better-than-average effect).
Our three-steps approach to effectively reduce biases
Surface biases and measure their strength and impact
Effective tools and methodologies are key to surface them in three stages:
Surface individual and collective biases through interviews
Conduct tests based on the CogPIT™ , our proprietary tool to capture and measure the strength of biases. This tool is tailored as biases and their impact differ depending on several factors (scope, corporate culture for instance). A Risk CogPIT™ for example is focused on key elements related to individual unconscious risk preference and perception, which lead to more or less tendency to risk-taking behavior – see focus.
Quantify bias financial impact through quantitative analysis whenever possible.
Analyse decision-making processes
Design the cognitive bias reduction plan
Design a tailored action plan to address biases generally targeting 3 areas: culture and impact of work environment, individuals, organization (process) and incentive systems.
Prioritize action plan to reduce impact of cognitive bias.