RISK MANAGEMENT AND SLOW THINKING

Some of the most important risks that need to be managed are the psychological pitfalls that characterise our thinking. Daniel Kahneman, psychologist and Nobel laureate in economics, tells us in his recent best seller that all people engage in two types of thinking: thinking fast, when they spontaneously and automatically search for intuitive solutions, and thinking slow, when they engage in more deliberate, effortful, conscious analysis. Although there are situations where one type of thinking is better than the other, Kahneman urges us to remember that neither type of thinking guarantees perfect decisions, especially when risk is involved.

Corporate managers make decisions just like everyone else, by sometimes thinking fast and sometimes thinking slow. And this goes for business decisions, not just personal decision, which prompts the question: What do managers need to know about their reliance on both types of thinking? The short answer is that managers need to know how to balance the two, and to recognise the relative strengths and weaknesses of each. It is easy to get the balance wrong. Specifically, it is easy to err by placing excessive reliance on intuition instead of careful analysis when it comes to tasks such as planning, budgeting, and making acquisitions. A particularly important behaviour pattern that results from such an imbalance is known as ‘the planning fallacy’.

Oct-Dec 2013 Issue

Santa Clara University