“When humans make decisions, we are often unaware of our own behavioural drivers or cognitive biases and the invisible pressures in our environment that affect us.”
- Blacker & McConnell, People Risk Management
What is Human Risk?
Human Risk encompasses loss to an organisation caused by human factors including the decisions and non-decisions, actions and non-actions of its people. "Loss" includes both financial and non-financial loss.
Human Risk can also be caused by how an organisation manages its people and what it demands from them.
As humans we make mistakes because we are...well, human. Understanding what factors increase the likelihood of us making ‘mistakes’ in the form of compromised or sub-optimal decisions, is the key to successfully identifying, managing and reducing the risk of loss due to human factors.
In the wake the GFC and more recently in Australia, the Royal Commission, non-financial risk and particularly the common risk that underlies most risk categories, human risk, has been in the spotlight.
Why is human risk challenging to manage?
Poor visibility of non-financial human risk is often cited as the main challenge for identification and management. As a result, investigations tend to focus on traditional responses such as ensuring the implementation of the 3 Lines of Defence risk management framework, increasing remediation provisions and focusing on the outcomes or consequences of this risk, rather than on the root cause and the likelihood of the risk. Calls for integration and a holistic approach to non-financial risk is a useful but not an adequate solution.
The cause of most financial risk is hard to see and in turn, quantify because it comes from decisions and behaviours resulting from multiple conscious and unconscious thought processes, values, beliefs, motivations, rationalisations and biases of individuals, teams, managers and leaders.
Understanding human thinking and human drivers has been intuitive and outside the traditional understanding and skill set of banking leaders largely educated to manage financial risk.
This needs to change. While intuition remains valuable both the law and regulators have stated that boards and their teams require additional expertise to identify and address non-financial risk if they are to survive.
Wired for safety, wired to survive
While the nature of work has changed dramatically over the past 200 years and particularly the past 50 years, the human brain has changed little in almost 250,000 years. However, in today’s mentally intensive economy our brains process complex information across a range of different subjects at a pace never seen before. Evolution has not yet caught up and the consequences are real and considerable as the demands placed on a system designed to manage mainly short term physical stressors not chronic psychological and social stressors, is put under increasing pressure.
The human brain remains first and foremost wired to survive. It's easy to forget this in the modern world and perhaps even more so in the banking environment however while the dangers may look different, the goal of every employee remains the same: safety, survival.
In the banking environment today, safety and survival may mean status protection, wealth creation to ensure financial security and access to resources, hierarchical power to obtain control and groupthink to maintain our place in a team. As social creatures we rely on others for access to resources for survival, therefore the need to belong, is powerful.
Understanding that innate human drivers, mostly unconscious and with a purpose primarily to stay safe and survive, can take priority over or at least conflict with company rules, Codes of Conduct and even the law, is powerful knowledge for leaders needing to mitigate human risk and losses stemming from it.
Despite individual differences, some of these innate drivers are common to all of us. Awareness of these common drivers allows for some degree of prediction of the situations, stressors or opportunities that may give rise to sub-optimal decision making, behaviour and associated losses and importantly, provide clues for prevention.
Improving your culture & increasing the value of your human capital
Banks that are educated about human factors and the risks that can arise from them are better able to create cultures of safety that support optimal human performance, minimise human error and reduce the costs resulting from them.
Progressive organisations and their leaders who invest in education and strategy focused on a deep appreciation of human risk and the factors involved, are the ones that will not only compete and survive but importantly thrive, in the future world.