Behavioral Risk Management

Managing the Psychology That Drives Decisions and Influences Operational Risk

Hersh Shefrin

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN: 9781137445605
• eBook ISBN: 9781137445629
• Topic: Business
• Subtopic: Corporate Finance
• Index: Business

The psychological dimension of managing risk is of crucial importance, and its study has led to the identification of specific do's and don'ts. Those with an understanding of the psychology underlying risk and the skills to recognize its manifestation in practice, have the opportunity to develop frameworks that embody the do's and don'ts, thereby producing sound judgments and good decisions. Those lacking the understanding and the skills are destined to be more hit and miss in their approach to risk management, doing the don'ts and not doing the do's. Virtually every major risk management catastrophe in the last fifteen years has psychological pitfalls at its root. The list of catastrophes includes the 2008 bankruptcy of Lehman Brothers and subsequent global financial crisis, the 2010 explosion at BP's Macondo well in the Gulf of Mexico and the 2011 nuclear meltdown at the Fukushima Daiichi power plant. A critical lesson from psychological studies for those involved in risk management is that people's judgments and decisions about risk vary with type of circumstance. In Behavioral Risk Management readers will learn that there are specific actions that organizations can undertake to incorporate understanding, recognition, and behavioral interventions into the practice of risk management. There are many examples throughout the book that illustrate doing the don'ts. The chapters in the first part of the book introduce the main ideas, and the chapters in the latter part provide insight into how to apply those ideas to the practical world in which risk managers operate.

Table of contents

• Cover
• Title Page
• Copyright Page
• Table of Contents
• Figures and Tables
• Preface
• Chapter 1. Introduction
• Part I
• Chapter 2. SP/A Theory’s Focus on Three Key Emotions
• Chapter 3. Prospect Theory’s Focus on Gains, Losses, and Framing
• Chapter 4. Biases and Risk
• Chapter 5. Personality and Risk
• Part II
• Chapter 6. Process, Pitfalls, and Culture
• Chapter 7. Minsky, the Financial Instability Hypothesis, and Risk Management
• Chapter 8. Aspirational Pitfalls at UBS and Merrill Lynch
• Chapter 9. Cheating Issues at S&P and Moody’s
• Chapter 10. Groupthink at Fannie, Freddie, and AIG
• Chapter 11. The Winner’s Curse Strikes at RBS, Fortis, and ABN AMRO
• Chapter 12. Behavioral Dimension of Systemic Risk
• Chapter 13. Financial Regulation and Psychology
• Chapter 14. Risk of Fraud, Madoff, and the SEC
• Chapter 15. Risk, Return, and Individual Stocks
• Chapter 16. How Psychology Brought Down MF Global
• Chapter 17. JPMorgan’s Whale of a Risk Management Failure
• Chapter 18. Risk Management Profiles: Con Ed, BP, and MMS
• Chapter 19. Information Sharing Failures at Southwest Airlines, General Motors, and the Agencies That Regulate Them
• Chapter 20. Conclusion
• Erratum To: Behavioral Risk Management
• Appendix A: A Deeper Dive into SP/A Theory
• Appendix B: A Deeper Dive into Prospect Theory
• Appendix C: Integrating SP/A Theory and Prospect Theory
• Appendix D: A Deeper Dive into Heuristics and Biases
• Appendix E: A Formal Model of Organizational Risk
• Appendix F: Modelling FIH Issues
• Appendix G: Empirical Proxies of Sentiment
• Appendix H: A Formal Model for Identifying Failing Banks
• Appendix I: FIH Issues in China and Europe
• Notes
• Index