Behavioral risk taking: Question all your assumptions

We humans make decisions about risk all the time. Throughout human evolution, our brains have adapted to allow for shortcuts in the processing of information, which in turn enables quicker decision-making. When facing a dangerous wild animal, we did not have to analyze the situation, we just ran. Our brains evolved to allow for quick decision-making, which in turn protected our species.

Human societies have evolved enormously since and so has the risk landscape. Nowadays, when making complex decisions on risk, these shortcuts don’t always lead to optimum decisions. The many forms of unconscious biases can hinder a creative, out of the box approach.

This year’s World Economic Forum Global Risks Report looks at the current risk landscape, a complex matrix of global, interconnected risks. Economic, environmental, technological, geopolitical and societal risks are ranked in terms of likelihood, seriousness and potential impact.

Trying to solve one risk can easily lead to unintended consequences that exacerbate other risks. So we can no longer continue to try solve these issues individually, nor can we continue to address them using the same old models and practices.

As Professor Klaus Schwab said just before this year’s Annual Meeting in Davos kickoff, it’s time to press the “reset” button on the world. Davos is about looking at our future in a much more constructive and strategic way.

But how do we make sure we’re looking at these issues objectively? What are some of the cognitive biases that can get in the way of making better risk decisions?

Anchoring bias can lead to decisions that reinforce a solution presented to the decision maker. Confirmation bias is when one’s decisions lean towards confirming a previous set of opinions. Status quo bias can occur when a decision maker is reluctant to deviate too far from the current state of affairs.

While these biases can bring about stability and efficiencies to a system, they can also also hinder innovation and creative thinking. Being a product of evolution, these cognitive biases can be hard to mitigate. Therefore, it is key that decision-makers put measures in place to ensure issues are tackled objectively, making best use of the resources at hand.

If we are to solve the big challenges we face, we will need to set up diverse, global partnerships that can collaborate across sectors and regions. These will ensure we look at issues from all angles, bringing together a broad spectrum of expertise that can help effectively solve issues. When faced with a decision, we should always ask ourselves: ‘What biases could be coming into play?’

From redressing income inequality (this year’s number one ranked risk) to food security and building urban resilience in the face of a changing climate (a key focus for Swiss Re in Davos this year), we will need to make best use of all available resources, and challenge all our assumptions. One thing is clear, business as usual won’t do. We need a reset.

Author: Jayne Plunkett is a Member of the Group Management Board and Division Head of Casualty Underwriting for Swiss Reinsurance worldwide.