Quantitative metrics vs cognitive biases: How can CROs foster psychological safety for better risk management?

Could events like Silicon Valley Bank’s failure be foreseen? The numbers told one story, but coupled with human instinct, could that story have changed? In this interview, Eric Schaanning, Chief Risk Officer at Leontiq, explores the human judgment necessary to interpret machine output and the biases that come with it.

Eric outlines cognitive biases that can distort risk decisions, highlighting:

• Social proof: Copying others under ambiguity, leading to risk underestimation
• Bias blind spot: The “I don’t have a bias” bias, which research suggests can be stronger among highly educated and experienced professionals

As a key behavioural safeguard for CROs, fostering psychological safety within teams is crucial, so that teams feel comfortable speaking up, especially when facts are unclear. The need for structured decision-making and judgment is critical now, as harder-to-quantify risks (such as geopolitics) are moving to the forefront.

Balancing numbers and instinct

The financial sector is primarily driven by quantitative metrics, such as value at risk (VAR) models, that are central to decision-making processes. Despite their importance, it is necessary to blend data-driven approaches with human intuition, especially in scenarios where predefined metrics may fail to predict outcomes accurately. The case of Silicon Valley Bank serves as a poignant reminder of how fully relying on published metrics can sometimes obscure imminent risks.

To master this balance, one must absorb both internal, model-generated data and external, publicly available information while synthesizing these insights into actionable strategies. This transition from pure quantitative analysis to judgment-based decision-making requires an awareness of how cognitive biases might influence these interpretations.

Cognitive biases: The invisible influencers

Cognitive biases often sway judgments in high-pressure situations. Social proof can be a particularly dangerous bias, where individuals may mimic the behaviours of others, especially amidst uncertainty. This conformity can lead to an underestimation of risks.

Another significant bias he notes is the "I don't have a bias" bias, where individuals recognise biases in others but remain blind to their own. Alarmingly, this bias tends to be more prevalent among highly educated and experienced professionals, making it a pressing issue in senior decision-making contexts. Introducing systematic decision-making tools could help mitigate such biases, ensuring a well-rounded and objective approach.

Fostering psychological safety

When addressing the necessary behavioural safeguards, Eric champions the creation of an environment that encourages psychological safety. Amid ambiguous situations, fostering a setting where individuals feel empowered to voice concerns without fear of reprisal is pivotal. This culture of openness and healthy debate can lead to more innovative solutions and robust risk assessments.

Future shifts in risk management

As we look toward the future, there will be an increased emphasis on the complexities of geopolitical risks, which are inherently harder to quantify. These challenges will shift focus toward structured and adaptable decision-making processes that can accommodate a wider range of unquantifiable risks. The ability to engage in thoughtful discussions about potential biases and enhance decision-making frameworks will be essential as new threats emerge.

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