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Are You Making Risk Management Decisions with Your Heart or Your Head?

author Michael Berman
3 min read
Feb 13, 2020

Love is a risky business. Just ask anyone who is gathering up the courage to share their feelings with the object of their affection this Valentine’s Day.

There’s the potential for utter bliss if their beloved feels the same way, but there’s also the risk of devastation, embarrassment, and heartbreak if rejected. It’s a high risk/high reward proposition.

For the risk averse, deciding whether to take a chance on love requires a lot of analysis. The problem is that the analysis is more likely to be driven by your heart than your head. Caught up in heady feelings, it can be hard to imagine the other person doesn’t feel the same connection, creating a sense of overconfidence. It’s also possible to build up a crush so much, putting her on a pedestal that makes the smitten feel as though he could never be worthy.

In both these instances, perception is confused with fact. The decision is made using personal feelings and experiences instead of more objective data such as whether the crush has ever spoken with the smitten before, if she has dated comparable peers in the past, and whether they share any common interests.

This misinterpretation of feelings as fact is known as emotional bias, and it’s not limited to love.

Research has found that feelings and personal experience influence perceptions of risk. Unlike cognitive biases, which are mental shortcuts we rely on to make decisions without having to think too hard, emotional biases are much harder to recognize.

Read also: Credibility in an Era of Misinformation: What is the Purpose of Auditing

7 Common Emotional Biases

Whether we want to accept it or not, every person carries her own background and experiences into risk management decisions. While these experiences can bring valuable insights, they can also color decisions in a negative way.

Here are some of the most common emotional biases that could be coloring your risk assessments and decision making:

  1. Loss-aversion bias. We feel the pain of a loss as much as two times more than the happiness of a gain. That means when weighing risk, we’re more likely to focus on the risk of loss than potential gains, even when the gains are likely to outweigh the risks. Similarly, we see the harm in a price increase more than we see the benefit of a price decrease.
  2. Optimism bias. This is the belief we are personally less likely to experience a negative event, such as a fire or data breach. It’s ignoring statistics because they apply to “other” institutions and people.
  3. Overconfidence bias. This occurs when we believe that our knowledge, skills, or experiences give us an edge in decision making that others don’t have. It causes us to place unearned value in our own ideas instead of systematically assessing the validity of others’ suggestions.
  4. Endowment bias. We have a natural tendency to place greater value in the things we own. For example, a bank board might refuse a market-value offer to buy the bank because they believe the bank’s value was underestimated—but they can’t offer any financially sound reasons for why it should be worth more.
  5. Status quo bias. Given the choice between change and keeping things the way they are, it’s common for people to prefer to keep things as they are. It’s avoiding change even when the risk of doing nothing is greater than the risk of taking action.
  6. Rule of thumb bias. We think bad things happen to other organizations because they don’t follow the rules. We tell ourselves that since we follow the rules, we have less risk.
  7. Confirmation bias. This is when our decisions are influenced by a desired income. With a goal in mind, we see what we want to see instead of the actual risks.

 

Tips for Avoiding Emotional Bias

Emotional bias in risk assessments and decision making is insidious, but it’s not unavoidable. Here are some tips for avoiding emotional bias:

Gather data. Emotional bias is based more on snap judgments than careful reasoning. While our gut decisions can be insightful, they should be complemented with an assessment of available data.

Challenge your decision making. Be a devil’s advocate and look for flaws in your assessments. Invite others to pick it apart and be open to their suggestions.

Don’t rush. Emotional bias is an easy crutch when under pressure to make a prompt decision. Make sure you give yourself enough time to reach a well thought out decision. It’s cheaper and easier to add a few days or weeks to the decision process than it is to undo a bad decision down the road.

Foster emotional intelligence. Emotions have a role to play in decision making, particularly in understanding why others think and act the way they do. Try to move past your own emotional biases to recognize them in others and respond with empathy and data.

 

Don’t let emotional bias cloud your decision making—either at work or in love. While risk can never be entirely eliminated, smart, data-driven analysis can help mitigate it.

 

Related: Creating Reliable Risk Assessments

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