Society for Consulting Psychology
Mid-Winter Conference
Las Vegas
January 30, 2011
Karen Steadman, PhD
Leadership Futures
Dirk Baxter, PhD, SPHR,
Leadership Futures
Tyler Nunnally,
CEO, Upside-Risk
Format for Session
• Introduction
• Audience Participation #1
5 to 10 minutes
• Panelists rotate 20/20/20 – share information &best practices.
• Audience Participation #2
60 minutes
• Facilitated Q & A
• Audience Participation #3
20 minutes
Decision-making and Risk-taking
• Approximately 315 marriage licenses are issued every day in Vegas.– How long did the 1998
marriage last between celebrities Dennis Rodman and Carmen Electra?
• 3 months
• 4 weeks
• 9 days
• 24 hours
Source: www.vegas.com
Decision-making and Risk-taking
Almost 2/3rds of Las Vegas gambling revenue comes from slot machines.– Approximately 3% to 25% of
each bet in a slot machine goes to the casino. Which of the following is a factor in the player winning?
• The machine and the casino
• Pulling the handle vs. pressing “spin”
• The timing of the last payout on the same machine
Source: www.goingtovegas.com
Decision-making and Risk-taking
– In 2007, the Bellagio reportedly had 22 bars staffed by160 bartenders*
– Las Vegas has one of the highest average number of drinks consumed per person in the country. What is the average # of drinks per person attending black tie events in Vegas?**
• 2.75
• 3
• 5.5
Sources: *The Bar and Beverage Book (2007) Katsigris & Thomas.**Successful Catering, Managing the Catering Operation for Maximum Profit (2003) Sony Bode
Behavioral Economics at Work
Presented by:
Tyler D. NunnallyFounder & CEO
Upside Risk
Presentation Topics
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What is Judgment Risk?
Behavioral Economics 101
Judgment Bias
Risk Appetite
Best Practices: Managing Judgment Risk
Presenter Background
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‘92 Summer Olympic Games (Barcelona, Spain)
‘93 Nunnally International Trade, Inc. (Prague, Czech Republic)
‘03 University of St Andrews (St Andrews, Scotland)
‘04 Global Business Consulting (Barcelona, Spain)
‘06 Oxford Risk Research & Analysis Ltd (Oxford, England)
’09 Upside Risk (Atlanta, Georgia, USA)
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PART I:
Judgment Risk
Key Risk Factors in the Decision-Making Process
What is Judgment Risk?
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Probability
of
Occurrence
Judgment Bias
RiskX
Severity
of
Likely Impact
Risk Appetite
“JUDGMENT RISK”
Risk Management Failures
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Alan Greenspan commenting on how human factor risks caused forecasting models to fail in subprime crisis
“I do not say that the current systems of risk management or econometric forecasting are not in large measure soundly rooted in the real world… But these models do not fully capture what I believe has been, to date, only a peripheral addendum to business-cycle and financial modeling—the innate human responses that result in swings between euphoria and fear that repeat themselves generation after generation with little evidence of a learning curve.
…Forecasters’ concerns should be not whether human response is rational or irrational, only that it is observable and systematic”.
Source: Alan Greenspan, “We will never have a perfect model of risk”, Financial Times, March 16, 2008.
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PART II:
Behavioral
Economics
101
Behavioral Economics 101
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Combines scientific disciplines of psychology and economics
“Bounded rationality” introduced by Herbert Simon (’78 Nobel Prize)
Prominence of study led by Kahneman & Tversky (’02 Nobel Prize)
Heuristics and biases
Way People Make Decisions
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SYSTEM 1
(Intuitive)
SYSTEM 2
(Reason)
Automatic
Spontaneous
Unconscious
Instinctive
“Gut feel”
Thoughtful
Controlled
Informed
Deductive
Analytical
Decision Making Under Risk and Uncertainty
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Diagnosis:
person scans, appraises and questions available information
Assessment:
risk versus rewards analysis made of available options
Action:
commitment to chosen course of action
Adjustment:
evaluate decision outcomes and adjust accordingly
Diagnosis
▼
Assessment
▼
Action
▼
Adjustment
Behavioral Economics Goes Mainstream
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NY Times Business Best Sellers
PREDICTABLY IRRATIONAL, by Dan Ariely
FREAKONOMICS, by Steven D. Levitt and Stephen J. Dubner
SWAY, by Ori Brafman and Rom Brafman
NUDGE, by Richard H. Thaler and Cass R. Sunstein
What the Critics Say…
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“Perhaps the greatest challenge facing behavioral economics is demonstrating its applicability in the real world”
Source: Levitt, Steven and List, John “Homo Economicus Evolves,” Science, February 15, pp. 909–10.
Real World Applications
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• Public Policy
• Consumer Choice
• Upside Risk’s approach: Risk Management
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“Risk management is a form of engineering: it uses science,
but ultimately depends on judgement… The ultimate
protection against risk is good judgement and alertness:
your own and that of your colleagues”.
Source: Risk Management, November 2005
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PART III:
Judgment
Bias
Probabilities & Statistics: Sample Size Bias
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Suppose the mean credit score of a sample population of 49 senior citizens is
650. The next senior citizen that you review has a credit score of 800.
What do you think the mean credit score of this group of 50 senior citizens will
be?
A. 598
B. 650
C. 653
D. 725
Judging Risk
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Decision traps people fall into when judging risk:
• Overestimate/underestimate real value
• Overestimate/underestimate chances of success
• Overestimate/underestimate chances of failure
• Overweight small probabilities
• Underweight large probabilities
• Failure to adapt to changing business conditions
• Erroneous forecasts, estimates and projections
Availability
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Perception of how “risky” something is often determined by how readily
examples come to mind from memory. Bias occurs when probability
assumptions become inflated by recent events.
US AIRLINE INDUSTRY PASSENGER REVENUES 1999-2004
Risk Exposure:
- Overly cautious
- Lost opportunities
- Falling profits
Confirmation Bias
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Suppose you and a colleague disagree whether it would be a good idea to
launch a new product. You believe that launching the product would be a
mistake. Your colleague believes that, if introduced, the product would be a
big success.
In this situation, what would you do?
A. Seek a third opinion from someone who I know would agree with my position
B. Seek out information that supports my position
C. Seek out information that contradicts my colleague’s position
D. Seek out information that could either support or contradict my position
Confirmation Bias in Practice
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FDIC v. Van Dellen et al - (Failed Bank Litigation)
31. Prior to the reorganization of HBD in 2006, Shellem had the power to object to a loan being approved by the Junior Loan Committee. … Van Dellen also directed credit officers to report to a single head credit administrator, Camp, who in turn was reporting to the CLO and lead Production officer, Rothman. This reorganization of HBD created the very blurring between credit and production functions that existed when Van Dellen first arrived at HBD in 2002, and about which regulatory agencies had previously complained. Both Koon and Shellem described Van Dellen’s reorganization as having created a serious conflict of interest.
Booms and Busts
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U.S. House Prices: 1988 - 2008
Key Risk Factors:
- Time discounting
- Confirmation bias
- Herding
- Overconfidence
Are things getting worse?
Karen Steadman, PhD
Presenter Background
• BS, Industrial and Systems Engineering, Georgia
Institute of Technology
• MS, Rehabilitation Counseling, Georgia State
University
• PhD, Counseling Psychology, University of Georgia,
• Founder, CEO – Leadership Futures, Inc.
Technology
• The system by which a society provides
its members with those things needed
or desired (Websters).
• Any tool that helps people make
decisions, act and achieve their goals.
Hard Soft
Vicente, KJ (2003) The Human Factor, Knopf Canada
Risk for Errors at all Levels
Political
Organizational
Team
Psychological
Physical
Mechanist HumanistOptimized
Leader
Assessment and Coaching
Physical
Psychological
Team
Organizational
Political
Healthy Work Environments
Assessment, Training, Coaching
Team Simulations & Action Learning
Organizational Design, Incentive Systems
Research and Social Change
Role of Consulting Psychologists
in Minimizing Risk of Error
Risk Appetite
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PART IV:
Risk
Appetite
Risk Preferences
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A person’s level of comfort in taking risk often determines business decisions
Risk Preference↓Risk Appetite
Risk Averse↓Risk Avoiding
Risk NeutralRisk Prone↓Risk Seeking
ConservativeDecisions
Middle of the Road Decisions
AggressiveDecisions
Job Performance
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Risk-taking behavior has a significant bearing on job performance
Risk Aversion Behavior:
Cause decision delays
Failure to take any action
Reliance on others to make
decisions
Risk Seeking Behavior:
Ignore underlying evidence
Lack of objectivity between options
Confirmation bias
Quantifying Risk Appetite
© 2010 Upside Risk Corporation. All rights reserved.
You have a significant sum invested in a project to develop a new product. If
successfully completed, the project could have a considerable financial impact on
your company. However, the project is overdue and over-budget. To complete the
project it will now cost double the original projected cost. You must now decide to
make the additional investment in order to complete the project, or to terminate it
altogether.
To complete the project, what probability of success would be required before you
would make an additional investment? Please choose one of the following
probabilities:
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
© 2010 Upside Risk Corporation. All rights reserved.
FDIC v. Van Dellen et al - (Failed Bank Litigation)
43. Only five weeks later, on November 30, 2006 at a meeting of the Bank’s senior managers, which included Van Dellen, corporate management warned of the declining market, describing among other things, a decline of 9.7% in the median price of new homes since September 2005 and mentioning that home builder volumes and margins were “under pressure.” The presentation was entitled the “wall of worry.” Nonetheless, Van Dellen continued, as late as the first quarter of 2007, to push for HBD to “grow production at double digit rates over the next five years.”
Excessive Risk Appetite
and Catastrophic Outcomes
Excessive Risk Appetite
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FDIC Troubled Bank List: 2007 – 2010
Risk Aversion and Falling Profits
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Prospect Theory
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People generally dislike
loss twice as much as
they like gains
People become risk
seeking in the face
of loss and risk averse
in the face of gains
Risk Domains
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A persons’ risk propensities are compartmentalized and divided into separate domains
• For instance, a heavy drinker and smoker may take health risks, but he is not necessarily the same guy who makes high risk investments with his 401(k).
© 2010 Upside Risk Corporation. All rights reserved.
PART V:
Best Practices:
Managing Judgment Risk
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“The best behavioral risk management strategy is to try and
arrest problem development earlier in the behavioral stage”.
Source: Rudy M. Yandrick, Behavioral Risk Management, 1996
Job Success & Failure
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Success: Failure:Embrace risk Too risk averseThinking ahead Short-term focusSeize opportunities Miss opportunitiesCalculated risk-taking “Betting the farm”Consider all the facts Ignore evidenceConfidence OverconfidenceCut losses Good money after bad Disruptive to market Follow the crowd Weigh cost vs. benefit Disregard risks
Judgment Risk Indicator
© 2010 Upside Risk Corporation. All rights reserved.
Key Risk Factor Category Risk Exposure
Judgment Bias
Sample Size Bias Probabilities and Statistics Low
Base Rate Bias Probabilities and Statistics Very High
Conjunction Fallacy Probabilities and Statistics Very High
Gamblers Fallacy Probabilities and Statistics Very Low
Overconfidence (Perception) Behavioral Bias High
Time Discounting Behavioral Bias Very High
Overconfidence (Actual) Behavioral Bias Moderate
Confirmation Bias Behavioral Bias Low
Illusion Of Validity Behavioral Bias Very High
Status Quo Bias Behavioral Bias Very Low
Herding Behavioral Bias Moderate
Framing Effects Behavioral Bias Moderate
OVERALL High
Risk Appetite
Status Quo Choice Dilemmas High
Sunk Cost Loss Choice Dilemmas High
Sunk Cost Gain Choice Dilemmas Low
Perception Investment Decisions Low
Benefits Investment Decisions Moderate
Behavioral Bias Investment Decisions Moderate
Willingness to Pay Risk vs. Reward Very High
Low Stakes Lottery Choice Moderate
High Stakes Lottery Choice Moderate
OVERALL High
Judgment Risk Indicator Matrix
© 2010 Upside Risk Corporation. All rights reserved.
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.20 0.30 0.40 0.50 0.60 0.70 0.80
Risk Appetite
Ju
dg
men
t B
ias
John Doe
Sample Population
HRisk Analytics
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0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.20 0.30 0.40 0.50 0.60 0.70 0.80
Risk Appetite
Ju
dg
men
t B
ias
A
B
C
D
E
F
Sample Population
Organizational Benchmarks
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Benefits & Uses
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SELECTION
DEVELOPMENT
TALENT BENCHMARKING
RISK MANAGEMENT
Q&A
Putting Science into Practice:
Top Takeaways
Takeaways
1. The time is now.
2. Recognize your own biases in client selection or consulting work.
3. Consider the business need before determining the risk appetite required.
4. Do not translate derailing behavior of a client in one domain to all of the other domains.
5. Consider the human factor in all of your consulting deliverables.
Takeaways
6. Trust behavioral change, not compliance to process checklists.
7. Understand at what level you need to need to intervene to make change.
8. Do not contribute to the problem if someone is in the wrong role or in the wrong organization.
9. Realize that sometimes things have to get worse before they get better.
10.Assess well rather than coach poorly.
Takeaways
Do not play the slots while in
Vegas
Karen Steadman, PhD
karen.steadman@ leadershipfutures.com
678.431.7354
Dirk Baxter, PhD, SPHR
dirk.baxter@ leadershipfutures.com
678.595.4770
Tyler Nunnally
CEO, Upside Risk
tnunnally@ upside-risk.com
404.320.6047