Limits of Risk Management

Question 1

What are the 6 factors of Risk Psychology (bias in individual decision making)?

Answer 1

1) Risk Culture
2) Endowment & Framing Effects
3) Ambiguity Aversion
4) Probability Distortion
5) Selective Attention
6) Loss Aversion

Question 2

What is a ‘risk culture’ ?

Answer 2

Collective attitudes of all members of a group–depends on values & practices within an organization, cannot be easily changed.

Question 3

What the Endowment Effect?

Answer 3

For the evaluation of goods, it makes a significant difference whether the goods are already owned by the individual or not

Question 4

What is the Framing Effect?

Answer 4

Finding different representation of identical alternatives can cause considerable valuation differences

Question 5

What is the Ellsberg-Paradox (Ambiguity Effect)?

Answer 5

From Daniel Ellsberg, US military analyst & Harvard economist interested in human behavior and decision-making under condition of uncertainty.

Question 6

What is the Prospect Theory?

Answer 6

The theory states that people make decisions based on the potential value of losses and gains relative to a reference point rather than the final outcome. People tend to overestimate small probabilities.

Question 7

What is Selective Attention?

Answer 7

An important human bias in decision making; the art of focusing on a particular object for a period of time while simultaneously ignoring irrelevant information that is also occuring (i.e: gorilla)

Question 8

What is Loss Aversion?

Answer 8

Psychologist Daniel Kahneman & Amos Tversky concluded from observations that ‘losses loom larger than gains’ (studies prove it to be twice as powerful pyschologically) and that people are loss averse.