Decision Making, Personality and the “Human” side of Risk
Understanding risk personality can give an insight into our approach and how we make decisions, our individual attitude to risk and our overall risk behaviours.
Traditionally risk management approaches focus on training, procedures, compliance and work environment factors. These are all what we call “objective” risk factors, based on fact, observations and measurements. Embedding the monitoring and control of those objective risks is done as we know through procedures and process documentation, oversight and an overall risk management and controls framework.
Considering Risk Personality
The interaction between personality and risk has for the most part remained unexplored when compared to these well studied objective risk measures and the processes we have put in place to manage them. These other “subjective” measures take into account our personalities, behaviours, judgements, feelings and points of view none of which we can fully incorporate in a checklist, compliance or oversight process.
The Missing Link in Risk Management?
A recent research study by eminent economists tracked senior bankers over a 15 year period as they moved from job to job. They found that the risk taking policies of a bank were determined more by the personality of the bankers in charge than any other measurable factor, including bonuses (Financial Times, 2016). In a separate study (Hagendorff et al, 2016) cited that of the banks they studied more of the decisions and the outcomes of those decisions could be explained by looking at the personalities of the individual bankers rather than looking at bonuses, compensation structures, and other observable things.
The key point here is that when it comes to incorporating a measure of “subjective” risk is that as human beings we have the ability to choose how we react and what our responses will be when faced with a stimulus or decision – in essence the “freedom to choose” is the personality factor in risk decisions and actions. So we can know what is supposed to happen but in essence we can all chose what direction we want to take which has most likely been a contributing factor to some recent financial crises, F&L and other regulatory breaches in the asset management and wider banking space.
Linking Personality to Risk Taking
Understanding risk personality can give an insight into our approach and how we make decisions, our individual attitude to risk and our overall risk behaviours. For example if we have more of a tendency to extroversion then we are more inclined to have a higher propensity to take risks, are more open to new experiences and conversely maybe more conscientiousness and wary if we have more of an introverted tendency. In order to really understand and leverage this personality using a framework to measure means that we can measure the personality factors.
One such framework for measuring this is the Risk Type Compass ™ which provides an insight into three risk areas.
1. Risk Type - Our personality determines which one of 8 Risk Types we most closely align to (Wary, Intense, Spontaneous, Carefree, Adventurous, Composed, Deliberate and Prudent) which in turn explains how we approach decisions, challenges and how we perceive, react to and manage risk itself. Knowing ourselves and understanding others allows us to reap the benefits of each (no good, no bad) but also manage disadvantages of each and leverage different approaches.
2. Risk Attitude - Unlike Risk Type which like personality does not change significantly our Risk Attitudes are flexible and are influenced by external factors, time and situations. Our Risk Attitude may for example and can be different in the area of financial security to that of recreational activities or our reputation. Examining Risk Attitude allows opportunities to adapt and learn to new situations and structures and how we can develop ourselves outside (or back into!) an acceptable or desired risk comfort zone.
3. Risk Tolerance - Overall Risk Tolerance brings together elements of our personality and Risk Type and our Risk Tolerance and identify the space within our Risk Comfort Zone. This supports understanding of our risk and decision making approach and our adaptability based on influencing factors giving an overall view into a person, team or groups risk seeking or risk adverse approach.
Culture, Teams and Diversity
Understanding and discussing the individual and group risk profile allows focus and risk practice to incorporate subjective risk into development of compliance and risk management frameworks. More importantly it can help identify similarities and differences within groups on approach giving an insight into culture and diversity of thought and highlights risks where a variety of personalities and decision making approaches are not in existence. This can be used for examining culture and team cohesion, informing recruitment and succession planning and supplementing “objective” risk management approaches to bring the “human” factor into both conversations and future risk culture plans. This also provides supplementary information to traditional risk management and diversity focus areas which are now very much part of regulatory reviews across all industries including asset management.
The Risk Type Compass Tool
The Risk Type Compass is a psychometric personality assessment which focuses on the way individuals perceive, react to and manage risk as well as how they make decisions.
The Risk Type Compass assigns participants to one of eight risk types based on their personality factors and also provides their overall risk attitude and risk tolerance index (combination of Risk Type and risk comfort zone).
Uses of the Risk Type Compass Tool - Individuals
The Risk Type Compass can be used as an individual coaching tool to understand risk and decision making approach, upside and downside tendencies of Risk Type, opposite and similar types and most prominent characteristics.
Teams / Groups / Board of Directors
The Risk Type Compass Group report illustrated a group risk profile according to the 8 Risk Types, Group Risk Type Balance (Diversity), Group Risk Type Influence (clusters, risk), Group risk tolerance and Centre of Gravity (decision making pull factors based on Group profile). This can be used for team engagement, management of diversity, review of risk culture, decision making approach, recruitment and selection and team coaching exercises.
Orla Carolan, Associate Director, Grant Thorton