An Introduction to Behavioural Risk
Behavioural risk management studies the psychology of financial decision-making. Interest in behavioural risk has been growing specifically because investors rarely behave according to the assumptions made in traditional financial theory. Risk behaviour is a huge issue in finance and examples of this risk type can be found in the news on a near-daily basis.
From Mark Carney’s proposal to put a proportion of bankers' salaries at risk in case of misconduct, to the FX rigging scandal and payment protection insurance corruption revealed at Lloyds, focus on and interest in risk behaviour is growing exponentially. Investment professionals can no longer afford to ignore or fail to grasp the psychological motivations which can drive high-risk decision-making. People in the industry are realising that there is a benefit to understanding people, their emotions and their behaviour because it impacts every aspect of business.
Author Cathy Hampson, Director at AIG and a qualified counsellor with an Advanced Diploma in Humanistic Counselling, brings together the psychology of investing and managing in one space. An Introduction to Behavioural Risk examines how to use this knowledge as a competitive advantage for investors and risk managers. It considers how risk culture is created in an organization, and how it can be assessed and changed as necessary. The book teaches readers how to better measure, monitor and harness ‘the human factor’ in driving performance and instituting good behaviour within company culture.
Due to the specificity of individual experience, behavioural risk can present unique situations, however there are many strong correlations between situations that can be harnessed nevertheless, allowing for the categorization of recurring issues and particular types of problems. An Introduction to Behavioural Risk will inform thinking and decision-making to enable the reader to better-challenge the current state of play at their organisations. Using the action plan and case study sections, readers will be able to create their own tailored approach to mitigating this risk.
The first part of the book will be about the theory with practical examples; at the end of that section will be specific case studies – one for investors and one for risk managers. The second part of the book will follow a ‘dip in, dip out’ format, in which problems are posed and ideas to solve them suggested – almost like an ‘agony aunt’ section for relevant investing and managerial problems.
An Introduction to Behavioural Risk explores the practical applications of behavioural finance for investment managers, traders and risk professionals, teaching the reader how to utilise key behavioural concepts to bolster personal performance and that of their company. Job titles of those interested in the book will include: CROs, CFOs, heads of analytic functions, board members, and bank and insurance regulators.
|Publication date||30 Dec 2015|
|Size||155mm x 235mm|
Section 1: Behavioural Risk: The Competitive Advantage
Chapter 1: What is the issue with risk and human behavior – what are we trying to solve?
- What is ‘Risk’ in this context and what is the problem to be addressed?
- What does the impact of individuals’ behaviour mean to an investor or a risk manager?
- Why does it matter to you how people behave?
- What are the variables in the equation?
Chapter 2: How do individuals react to risk and why?
- How differently do people behave?
- How will I know how to interpret the reactions – quantitative and qualitative approaches?
- Related behavioral science
- What are the people risk factors?
- What about risk aberrations – the mavericks?
Chapter 3: What is your own attitude to risk – how well do you understand it?
- The benefit of self-knowledge
- Has risk helped or hindered you?
- How does your own attitude to risk change over time?
- What risk attitude changes should you be anticipating?
Chapter 4: How does individual behaviour translate into a risk culture?
- What is risk culture in tangible terms?
- What personality types do you need?
- The influence of the leader
- Does the whole equal the sum of the parts?
Chapter 5: How can you judge an organization’s culture?
- The parameters and dimensions of a risk culture
- Clues available to track
- What is ‘good behaviour’ and how is it rewarded?
- What works and does not work in changing behaviour and culture?
Chapter 6: Understanding both individual behaviour and company culture, how can you use this information to your advantage?
- Risk culture awareness – how can it help maximise returns?
- Identifying emotional patterns and risk/return ratio impact
- Bias in the investment process
- Decisions for investments – using behavioral knowledge as a competitive advantage
Chapter 7: How can you spot that culture is changing and the ‘early warning signs’ of a future impact?
- Related key risk behaviour indicators
- Herding effects and their impact
- Imminent short term versus long term effects
- Feedback loop on the changed culture
Chapter 8: How can you embed this knowledge in an effective framework?
- An effective framework approach
- Control of emotions for the best effect
- Acting on signals regarding behavior
- Knowing when to change the approach
Chapter 9: Reaping the rewards of the competitive advantage
- Structuring of reward
- Incentivizing and personality
- Unintended consequences
- Keeping the competitive advantage
Chapter 10: Conclusions
- The individual that you are and what works for you
- Action plans
- Unintended consequences
- Keeping the competitive advantage
Competitive Advantage Case Studies
- Investor Case Study
- Risk Manager Case Study
- Real Life Case Study
Section 2: Workbook – ‘Risky Situations’
- This will be a series of plausible, fictional case studies that are categorized so that they can be sampled separately, as and when the reader wants to look at a similar situation to one he/she is facing. A real life case study will be used also to show the reader the benefit of measuring and monitoring and used as a feedback loop / back-testing to the book’s core proposals.
- There will be a question and answer conclusion to each case study that takes the investor/risk manager down a series of decisions and outcomes, to show the reader that an attitude to risk and the variation in risk behaviors can result in very different outcomes.
- The impact of the case studies is to demonstrate to the reader that the content of the book – how to understand risk behaviour, how to interpret it, look for signs etc. is valuable because it can demonstrably change an outcome.