Organizational financial and risk cognitive bias diagnostic

Diverseo > What we do > Risk and Finance > Organizational financial and risk cognitive bias diagnostic

Risk assessment and financial decisions are affected by cognitive biases

Regulation, financial product complexification, evaluation tool multiplication, time pressure… financial decision-making is becoming trickier so that investors can be tempted to trust their intuition to overcome this complexity. “Intuition”, triggered by our unconscious system 1 of thinking, can be a powerful and fast tool to solve complex problems, but it can also lead us to make wrong decisions outside of our own awareness.

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

Step 1

Surface biases and measure their strength and impact

Identifying biases by oneself is very difficult as they are often unconscious and deeply ingrained at the individual level and “melt” in the corporate culture and work environment at a structural level.

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.

Step 2

Analyse decision-making processes

Processes are a sequence of decisions and/or actions that constitutes a flow of information through several stakeholders. Biases can act upon these processes in two different ways: stakeholders within the processes can be biased or the design of the process itself can reinforce biases. Through step-by-step analysis and interviews, the Decision-Making Process Scan allows surfacing explicit and implicit biases in the decision-making process and what may reinforce them. Any process can be analyzed through a bias lens, from credit granting to trading or provisioning.

Step 3

Design the cognitive bias reduction plan

An effective bias reduction plan is supported by three core pillars: shift mindsets thanks to CogPIT™ ,actively manage cognitive profiles in your team thanks to our Cognitive Dashboard™ and objectivize decision-making processes. Two steps are necessary to reach these goals:

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.