7 Human factors associated with risk reporting
Risk reporting and communication can be made more difficult due to ‘human factors’. Some common factors are:
| Human factor | Description |
|---|---|
| Optimism bias | People believe that negative events are less likely and positive events more likely than is the case. |
| Burying bad news | Where bad news is not shared and even hidden. The case of Nick Leeson at Barings Bank is a classic case of burying bad news. The large losses he sustained were only found when they became too large to hide. |
| Hero culture (that loves firefighting) | A hero culture is one where hard working and highly talented people, through ‘sheer strength’ and ‘will power’, fix seemly insurmountable problems. The problem is that if these people get praised and highly rewarded for their efforts, whereas people who prevent the seemingly insurmountable problems from arising in the first place are ignored, poorly rewarded and overlooked for promotion, the organisation will tend to be one which moves from crisis to crisis without an effective approach to risk management that secures long-term growth |
| Organisation silos | Different departments, locations or groups do not share information, goals or processes with one another. This impacts operations, efficiency and morale. |
| Loss aversion | Is the psychological tendency to prefer to avoid a loss rather than acquire a similar gain? |
| Group think | Does the organisation favour internal harmony and consensus over getting the right decision? Group think is often associated with irrational or dysfunctional decision making. |
| Poor estimate of risk | The assessment of risk can be flawed if the activity is new or novel or if the risk rarely happens. Estimates can also be effected by behavioural factors and incentives. For example, the incentives may be to downplay or underestimate threats, in an attempt to make a situation look better than it really is. Common examples include large capital programmes and acquisitions, where underestimates of risk lead to large overruns in cost and time or destruction of shareholder value. |
| Halo effect | Recent or more memorable events are more highly thought of, and the impression created in one area (e.g. a previous activity) influences opinion of competence in another, unrelated, area. |
Activity 2 Controls and human factors
Look at the controls below and consider how human factors might influence their effectiveness.
a.
Competence (person not properly trained)
b.
Fatigue (person is tired)
c.
Impaired performance (under the influence of drugs or alcohol)
d.
Distracted (other things catching their attention)
e.
Over worked (too much work to properly operate the control)
f.
Pressure
g.
Deliberate action
The correct answer is a.
a.
Competence (person not properly trained)
b.
Pressure
c.
Fatigue (person is tired)
d.
Impaired performance (under the influence of drugs or alcohol)
e.
Distracted (other things catching their attention)
f.
Over worked (too much work to properly operate the control)
g.
Deliberate action
The correct answer is c.
a.
Competence (person not properly trained)
b.
Pressure
c.
Fatigue (person is tired)
d.
Over worked (too much work to properly operate the control)
e.
Impaired performance (under the influence of drugs or alcohol)
f.
Distracted (other things catching their attention)
g.
Deliberate action
The correct answer is e.
a.
Pressure
b.
Competence (person not properly trained)
c.
Fatigue (person is tired)
d.
Impaired performance (under the influence of drugs or alcohol)
e.
Over worked (too much work to properly operate the control)
f.
Distracted (other things catching their attention)
g.
Deliberate action
The correct answer is f.
a.
Pressure
b.
Competence (person not properly trained)
c.
Fatigue (person is tired)
d.
Deliberate action
e.
Impaired performance (under the influence of drugs or alcohol)
f.
Distracted (other things catching their attention)
g.
Over worked (too much work to properly operate the control)
The correct answer is g.
a.
Competence (person not properly trained)
b.
Over worked (too much work to properly operate the control)
c.
Deliberate action
d.
Distracted (other things catching their attention)
e.
Pressure
f.
Impaired performance (under the influence of drugs or alcohol)
g.
Fatigue (person is tired)
The correct answer is e.
a.
Competence (person not properly trained)
b.
Over worked (too much work to properly operate the control)
c.
Pressure
d.
Distracted (other things catching their attention)
e.
Deliberate action
f.
Impaired performance (under the influence of drugs or alcohol)
g.
Fatigue (person is tired)
The correct answer is e.