Magazine article Risk Management

The Psychology of Risk: Understanding and Overcoming Natural Human Responses to Risk Is an Important-And Often Overlooked-Component of Effective Crisis Management Planning

Magazine article Risk Management

The Psychology of Risk: Understanding and Overcoming Natural Human Responses to Risk Is an Important-And Often Overlooked-Component of Effective Crisis Management Planning

Article excerpt

Over the past several years, psychologists, behavioral scientists and academics have helped to advance our understanding of human psychology and, specifically, how humans respond to high-risk and crisis situations. This research has highlighted how a lack of pre-crisis training and preparation may exacerbate risk and cause unnecessary errors during times of stress and uncertainty.

The good news is that these experts can also help us better understand the best ways for businesses to help individuals prepare and train for such situations so they can contribute positively to the risk management and crisis mitigation process.

But while the need for crisis and business continuity planning is clearly recognized by a wide swath of businesses and many endorse and utilize such programs, the degree to which companies and their risk managers have embraced the findings of what some call "the psychology of risk" is sorely lacking.

RISKY THINKING

The psychology of risk is the study and understanding of the mental processes underlying our responses to risky situations, the recognition of a risk's impact, and the development of frameworks that can help individuals make sound judgments in the face of risk.

When it comes to the psychology of risk, "there is still a lot of room to go and businesses are only at the beginning in terms of understanding that there are coherent frameworks available that could help them improve the practice of risk management," said Hersh Shefrin, the Mario L. Belotti professor of finance at Santa Clara University's Leavey School of Business and the author of Behavioral Risk Management: Managing the Psychology that Drives Decisions and Influences Operational Risk.

According to Shefrin, psychology has likely played a larger role in crisis response than many people realize. "Every single risk management disaster in the last 15 years, including financial disasters, has had psychological issues at the root," he said. "Whether it's an earthquake, natural catastrophe or a financial disaster, it is often compounded by our psychological imperfections."

These issues can result in bad decision-making, he added, citing as prime examples the errors in thinking that led to the explosion of BP's Deepwater Horizon in the Gulf of Mexico, General Motors' faulty ignition switch recalls in the United States, and the nuclear meltdown at Fukushima Daiichi in Japan. Events such as these, he said, should be a clear incentive for more companies to implement and regularly update risk and pre-crisis training, and to incorporate a heightened understanding of human psychology into such programs.

"Pre-crisis training that takes psychological factors into account makes a notable difference" in a company's response to an unexpected or crisis event, said Timothy Sellnow, professor of strategic communications for risk management at the University of Central Florida, where his research focuses on pre-crisis planning. "When we are able to rehearse for risks, we develop the kinds of muscle memory to enact a positive response more quickly and efficiently. With proper training, we can also draw employees' awareness to psychological pitfalls that can occur when under stress, helping to ensure that they avoid these pitfalls and faulty decisions that can exacerbate outcomes."

HARDWIRED RESPONSES

Recognizing the importance of psychology in risk training starts with understanding that humans are hardwired to avoid threats in their surroundings at all costs and that the traditional "fight or flight" response is one of the most primal instincts. In a crisis, the brain's threat response occurs quickly--within milliseconds--and can cause strong physiological reactions, such as increased heart rates, but can also diminish cognitive ability and seriously impede the ability to make effective decisions.

"Risk is an inherently complex concept and is an invention of the human mind to help people deal with things that can be harmful and dangerous," said Paul Slovic, professor of psychology at the University of Oregon and president of Decision Research, who has written extensively on how individuals perceive risk differently. …

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