A Behavioral Approach to Risk Management
The findings of behavioral finance are starting to be integrated with classical approaches to risk management. Traditional risk management focuses on technical and financial models of reducing risk. Yet we have seen in the latest global economic and financial crises that these models at best are not very effective. It has become clear that risk management must formally integrate behavioral approaches in order to significantly improve risk management in companies.
What is Behavioral Risk Management (BRM)?
BRM is about improving the quality of financial outcomes through reducing behavioral risk that leads to increased financial risk.
BRM recognizes that financial outcomes cannot be improved just by apparently increasing recorded profitability. In order to improve the quality of financial outcomes, the right behaviors must be present so that the desired financial outcomes are sustainable, and not just a result of financial engineering.
What are the key Components of BRM?
There are three key components of BRM. These are:
- Behavioral assessments of financial behaviors
- Training in awareness of the impact on financial outcomes of one’s behaviors.
- Implementing this awareness through changes to behaviors, internal processes and organization structures.
This course covers two days and includes extensive use of work-groups, simulations and other practical exercises as well as presentations of the basic models. It is aimed at financial and other managers involved in risk management in companies, financial services companies and institutions and analysts involved in ratings, valuation analysis and risk reduction.