The importance of understanding bias when making decisions about risk
January 13, 2023 |
7 min read
We each carry our own personal biases which, for good or bad, can influence our attitude to risk. An appetite for risk and bias are important when making decisions about risk. Here is a story that illustrates this.
A few years ago, the night before a Champions League final match between Atlético Madrid and Real Madrid, I had a dream that Real Madrid would win 4-0. It was so vivid, I decided to place a bet on that outcome. I rarely gamble and my appetite for risk is so low that even a £5 bet seems high. But with odds of 5,000/1, I was tempted; if I won, I could pay for a luxury holiday or perhaps a new car. The gambling website I used offered me a promotion: if I bet £25, it would be doubled to a stake of £50. With £250,000, I could pay off my mortgage. How could I resist?
By placing a £25 bet, I had breached my appetite for risk. All the rules I knew from Management of Risk (M_o_R) best practice were instantly forgotten. And, of course, 18 minutes into the game, Atlético Madrid scored. My dream was over, and I was £25 down.
When I told this story to my class, one student said the biggest single stake he had ever lost was £1,500. The difference between him and me, though, was that while he was single with no children, was on a high salary, and had a large amount of disposable income, I was married with two young children and a mortgage.
Which of us had the right approach to risk? The truth is our personal biases meant our own approach was right for each of us. In an organization, on the other hand, a precedent should be set for all employees to follow so that everyone works from the same page, irrespective of such biases. This means I can continue to be conservative and never gamble again, while my student can bet £1,500 every weekend if he wants. But when we are working on a project or organizational initiative, we will both be in sync.