A New Look at Risk Psychology in Financial Services

Financial sector risk can be ameliorated by accurate data and adherence to procedures but, ultimately, individuals have to make judgements. Furthermore, research informs us that judgements are easily influenced by the decision-maker’s risk disposition. Risk professionals, regulators and international standards institutes increasingly recognise that these personal biases contribute to human factor risk.

PCL and KPMG came together on 8 December to promote this new understanding of risk management at Risk Type: The ‘People Dimension’ in the Risk Equation event held in the heart of the financial sector, at Canary Wharf. Our own Risk Type Compass® tool looks directly at how personality affects our risk-taking behaviour, whilst KPMG’s focus is also broadening from controlling risk via processes to encompassing an understanding of individuals’ decision-making processes.

 

Regulation Alone Doesn’t Cut it
James Maycock (KPMG) kicked off proceedings with some really interesting analysis of past rogue trader activity and the challenges posed for the financial industry in detecting these behaviours. Continuing with the theme of defence against such infractions, Kennedy Masterton-Smith (KPMG) then gave an update on the regulatory system’s recent and pending developments. James Burgess (KPMG) provided some fascinating insights into the techniques being developed to monitor trader behaviour. Candid about both the successes and the technologies that clearly still have a long way to go, he illustrated the considerable challenges and the progress that was being made on a number of fronts.

What stood out from these presentations was the scale and intransigence of these security threats and the complex strategies required to deal with them. There are also concerns that traditional risk management processes and procedures may inhibit enterprise and creativity, or may simply not be able to react fast enough. This was the context for evaluating the potential contribution from risk psychology.

 

The Human Factor in Risk Management
Geoff Trickey (PCL) discussed several years of research into risk personality and new people-centric strategies in risk management. Explaining how the Risk Type assessment complements regulatory processes, he described the roots of risk-taking personality characteristics and the Risk Type Compass framework. This set the scene for the forthcoming case studies from Steven Goldstein (Alpha R Cubed Ltd) and Ruth Murray-Webster (Associated British Ports Ltd) who have been using the Risk Type Compass in very different spheres.

Steven Goldstein shared his observations on Risk Type trends in different types of trader and discussed the benefits of understanding one’s own Risk Type. With 25 years’ experience as a trader, and five as a coach specialising in the financial sector, Steve’s insights provided fascinating examples of how the Risk Type approach can increase both individual and company performance.

The concluding presentation by Ruth Murray-Webster explained how Risk Type can be used to improve team and board performance. By analysing a group’s Risk Type dynamics, organisations can help to maximise constructive dialogue and reduce tension and dissension. Additionally, awareness of a group’s overall risk disposition and the balance of Risk Type perspectives helps to achieve more considered decision-making.

Altogether it was a highly successful event. It was great to see so many professionals gathered in one place to address the challenges of financial regulation and these new perspectives on the human factor aspects of risk management. Thank you to all of the speakers and to KPMG for co-hosting the event with us.

Contact  tony@psychological-consultancy.com if you would like to talk to us about risk psychology in the financial sector or to hear about future events.