Enterprise risk management (ERM) frameworks operate on the assumption that investors, managers, and all other types of decision-makers within an organization are rational individuals who make optimal decisions within the context of the organization. In recent decades, however, abundant evidence has emerged from behavioral economics, psychology, neuroscience, game theory, and judgment and decision-making (JDM) that challenges this assumption by demonstrating that the rational choice framework embedded in ERM is not sufficient to explain the balance of human behavior. It has been shown that decisions are motivated by a complex array of nonrational factors, which can give rise to systematic errors known as cognitive biases. Accounting for these variables is crucial for describing and better predicting various aspects of decision-making relevant for ERM: Organizations are defined by the coordinated decisions of multiple individuals, all of whom are susceptible to irrational behavior. These behaviors are particularly salient in the case of risk identification, risk quantification, and setting risk appetite, essential core activities of ERM.
In their newly published textbook A Behavioral and Cognitive Approach to Enterprise Risk Management, authors Rich Lauria, FSA, CFA, and John Burkhardt, Ph.D., highlight key findings in the developing field of behavioral economics, with a focus on application of what the field has learned about cognitive biases to both traditional and value-based enterprise risk management approaches. In broad strokes, the text introduces ERM students and practitioners to terminology, concepts, and technical aspects of behavioral economics theory. It explains how behavior emerges and manifests in individuals and how these compound within organizations. It discusses manifestations of various cognitive biases. All of this is combined within the text to present more robust predictive, decision-making, communication, and mitigation approaches for ERM practitioners and is brought to life through real-world examples and case studies. The textbook is the sole required reading source for all students taking the ERM program elective “Cognitive Bias and ERM.”
Moderators:
Rich Lauria, Associate Director and Lecturer, Enterprise Risk Management
H.S. Bob Kostakopoulos, Deputy Program Director & Part-Time Lecturer, Enterprise Risk Management
Speaker:
John Burkhardt, Ph.D., CEO, Capita Solutions
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