Elements of Risk Management - StarChapter€¦ · Elements of Risk Management Insights & Ideas from...
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Elements of Risk Management Insights & Ideas from Prospect Theory & Psychology Rashid N Kapadia PMP PMI-CLG April 27, 2017: 7:00 pm - 8:00 pm Las Haciendas Mexican Restaurant, 1020 NASA Road One @ Gulf Freeway, Webster, TX 77598
Transcript of Elements of Risk Management - StarChapter€¦ · Elements of Risk Management Insights & Ideas from...
Elements of Risk Management
Insights & Ideas from Prospect Theory & Psychology
Rashid N Kapadia PMP PMI-CLG
April 27, 2017: 7:00 pm - 8:00 pm Las Haciendas Mexican Restaurant,
1020 NASA Road One @ Gulf Freeway, Webster, TX 77598
Houston, TX
RISK management failure?
2008 Global Financial Crisis
RISK management failure?
2008 Global Financial Crisis
Tuesday, April 27, 2017
Clear Lake & Galveston
What would I have done differently?
Mismatch?
Fighting the last war?
RISK
42 million on an off day
Prospect Theory
Power of Noticing
Intuition & Heuristics
Prospect theory
Prospect Theory
When confronting losses decision makers are
more likely to take risks
than when they are satisfied with the status quo
Daniel Kahneman Amos Tversky
Prospect Theory
When confronting losses decision makers are
more likely to take risks
than when they are satisfied with the status quo
Domain of losses
Domain of gains
Experiment 1
I give you $ 300
Plus a choice between option A & B
Experiment 1
A = I give you another $ 100
B = You toss a coin.
If you win the toss I give you $ 200
If you lose the toss I give you $ 0
Experiment 1
Most people choose option A
Experiment 2
You already have $ 500
Plus a choice between option A & B
Experiment 2
A = You give me $ 100
B = You toss a coin.
If you win the toss You give me $ 0
If you lose the toss You give me $ 200
Experiment 2
Most people choose option B
When facing losses we are more risk seeking
When facing gains we are more risk averse
President Dwight
Eisenhower
U-2 crisis
Assumptions
Soviets cannot shoot down U-2 due to high altitude
Pilot cannot survive such an attack
Wreckage of US U-2 plane shot down over Soviet Union - May 1, 1960
Francis Gary Powers
President Eisenhower plunged into
Domain
of Losses
Prospect theory recap
When facing losses we are more risk seeking
When facing gains we are more risk averse
President Dwight
Eisenhower
Add language to risk management conversation
Prospect theory
Domain of losses
Domain of gains
personal example
Prospect theory
Prospect Theory
Power of Noticing
Intuition & Heuristics
Inattentional Blindness
Look for woman with umbrella
Do not focus too hard
Inattentional Blindness
December 1977
Eastern Airline flight 401
Eastern Airlines flight 401 leaves New York for Miami
11:33 pm - prepares to land in Miami
11:34 - Cockpit crew realizes that the landing gear light has not come on
Miami tower clears flight 401 to go around
Captain to first officer “Engage auto-pilot”
Crew gets fixated faulty light?
or malfunctioning landing gear?
inattentional blindness !
Auto-pilot accidentally disengaged
No one notices
inattentional blindness !
Crew remain fully focused on the light
inattentional blindness !
Plane begins descending
inattentional blindness !
Crew does not notice
inattentional blindness !
11:41 Crew realizes something is wrong with the altitude
11:42 Flight 401 crashes into the Everglades
101 fatalities
(75 survivors)
Inattentional Blindness
Do not underestimate!
Inattentional Blindness?
global financial crisis
Motivated Blindness
Motivated Blindness
Failure to notice risky behavior when it is not in our best interest
If incentivized to view someone positively it is more difficult to access risky behavior
Penn State Football
Aggressive Traders
Rating Agencies Auditing Companies
Political News Reporting & Consuming
Publishing Scholarly Papers
Motivated Blindness
Do not underestimate!
Motivated Blindness?
global financial crisis
Slippery Slope
Bernie Madoff
Slippery Slope
example
Bernie Madoff fraud
Large cast of stakeholders failed to notice
Inattentional blindness
Motivated blindness
Slippery slope
Open Secrets
1998 6 students from Cornell 6 week project in Enron
reviewed Enron’s accounting practices
analyzed Enron’s businesses
conclusions
strategy far riskier than competitors
1998 6 students from Cornell 6 week project in Enron
conclusions
may be manipulating earnings
1998 6 students from Cornell 6 week project in Enron
conclusions
stock is overpriced
1998 6 students from Cornell 6 week project in Enron
conclusions
recommendation = SELL
1998 6 students from Cornell 6 week project in Enron
Inattentional Blindness?Motivated Blindness?Slippery Slope?
Inattentional Blindness?Motivated Blindness?Slippery Slope?
Inattentional blindness
Motivated blindness
Slippery slope
Power of Noticing Summary
Prospect Theory
Power of Noticing
Intuition & Heuristics
Heuristics
A heuristic enables us to make a decision fast
without much searching for information
but still with accuracy
make it simple
make it complex
high uncertainty
low uncertainty
make it simple
make it complex
many alternatives
few alternatives
make it simple
make it complex
little data
lots of data
With uncertainty intuition is indispensable
A heuristic can be safer and more accurate than a calculation
Summary
Prospect theory recap
When facing losses we are more risk seeking
When facing gains we are more risk averse
Add this language to risk management conversation
Prospect theory
Domain of losses
Domain of gains
Inattentional blindness
Motivated blindness
Slippery slope
Add this language to risk management conversation
What else will I do?
Autopsies without blame
Climate where the truth is heard
Red flag mechanism
Key lies in turning information into information that cannot be ignored
October 1962
Cuban missile crisis
October 1963
Nuclear test ban treaty
Risk Management An Unending
C A M P A I G N !
Convince Charm Cajole
Thank You
