Perception, Risk and Safeguards

I gave a talk today at the Enterprise Risk Management (ERM) Symposium in Washington D.C. We divided the time 60/40 between my presentation and a group discussion on implications, especially for the Insurance industry. We had a lively discussion with CROs and risk professionals
and my observations on perception of risk seemed to resonate. I summarise this element here.

I read recently of a study performed in 2008 in which an audience was asked to watch a video clip and count the number of passes made by a basketball team in one minute. A high percentage of the audence got it right. The number was 13.

They were then asked if they spotted the person in a fancy dress bear outfit who moonwalked across the basketball court in the middle of the one minute clip. Confused, most people admitted they did not. It is fascinating that we tend to see what we expect and block out events or images we are not expecting. This has amusing consequences (in video conferences, for example) but has a serious implication for risk management professionals and executive management tasked with driving performance and avoiding the pot-holes of commercial existence.

In these days of regulation and compliance, the consequence for risk management and the finance team is that we tend to view the world through the lens of the safeguards we have implemented to protect us from risk. These safeguards are typically internal controls which are tested rigorously and with great focus (I hope), but we sometimes lose sight of the underlying risks. My recurring analogy for this is the car park barrier (safeguard, internal control) and the tyre tracks (risk) . . .

The evidence of the weakness of human perception and our tendency to see what we expect drives a common reaction in our continuous risk monitoring work. 'THAT CAN'T HAPPEN' is a typical response to some of the more worrying exceptions reported. Of course, these things can happen and do. The tyre tracks tell the story. It takes some time of gradual realisation before the stakeholders really understand the image above and recognise that we make big assumptions about the existence, operation and effectiveness of our safeguards and internal controls.

If you are still not convinced about the vagaries of perception, take a look at this image below. What do you see?

Thanks for reading . . .