Even though there were significant rule changes after the financial crisis, companies keep facing fraud and unethical actions, leading to over $400 billion in fines by 2020. Fortune 500 companies deal with more than two proven internal wrongdoing incidents every week.
Many experts in risk management believe that the usual way of preventing business wrongdoing isn’t enough. Financial institutions are now adding a behavioral approach, understanding that people’s behavior at work is influenced by factors like their teams, goals, leadership, and processes.
Behavioral risk management means recognizing what drives behavior and managing it by changing processes or the work environment. This can involve small interventions, called “nudges,” that have meaningful effects on behavior.
What’s New in Behavioral Risk Management?
Traditional risk management assumes people act rationally, but behavioral science shows that human judgment is biased. People tend to overvalue recent evidence that supports their existing beliefs.
Moreover, traditional risk management has its problems. When people fear punishment for their mistakes, they hide them, and a culture of distrust encourages breaking rules.
Analyzing Risky Behavior:
Behavioral risk management looks at processes and structures to find what causes risky behavior. For instance, a securities trading team with overconfident members may act unethically if their leader has low ethical standards. If individual sales achievements are rewarded, team members might rationalize unethical behavior.
Instead of relying solely on rules and supervision, a behavioral approach aims to understand the factors influencing behavior. Even well-meaning employees might engage in risky behavior due to the system or team culture.
Steps in Behavioral Risk Management:
- Look at data like employee surveys, client satisfaction, team cultures, and policy violations.
- Behavioral insights scans help managers understand obstacles to smart decision-making.
- Investigate behavioral patterns and factors in high-risk units or teams.
- Talk to employees confidentially to understand how they react to their work environment.
- Identify nudges to encourage desired behavior.
- Conduct workshops, like “nudge labs,” to brainstorm and create interventions.
- Implement interactive sessions for executives to build common understanding and solutions.
Behavioral risk management is proactive, using data to uncover workplace realities. While it’s challenging to provide clear proof of success, a well-structured project can significantly reduce the chances of risky behavior.