The Role of Noise in Risk Management: A psychologist’s take on an often underappreciated and often misunderstood topic.
Prior to working in management consulting, I was a career academic. I taught a variety of psychology courses at a university and conducted cognitive psychology research (although I also engaged in large-scale replication work trying to address fundamental issues in how psychological science was conducted). Through my doctoral training, research, and professional experience in the field, I began to become acutely aware of how misconceptions or misunderstandings of key elements of psychology and neuroscience have crept into society’s day-to-day topics. Risk management, as a discipline, is no different. While there are certain elements of psychology within risk management, such as things like cognitive biases, which are reasonably well understood, communicated, and applied to risk management problems, there are others where I still see gaps (which is only natural).
One key element I think most people inherently understand about psychology is that as a discipline, it approaches the same problem or situation from multiple layers of analysis which all mesh together in our larger understanding and appreciation of our own reality. This ranges from rather large macro-level elements within social psychology and reduces all the way to cellular (and in some instances sub-cellular) levels within the nervous system. My area of expertise sits in the cognitive layer with a large emphasis on how neurological principles and cognitive function are related. From a basic science perspective, that is what always interested me as a researcher. One of the areas in this layer I was fascinated by was the concept of noise. Thanks to popular researchers, like the late Daniel Kahneman, the idea of noise in risk management has gained some traction in recent years. However, the element of noise I was interested in was far more fundamental than what Kahneman was describing. I was interested in neural noise and how it changes, and fundamentally increases, across the lifespan. I won’t go into all of the details here but essentially; neural noise influences every single element of cognitive processing from the sensory input stage all the way to behavioral output. Furthermore, the distribution of noise fundamentally increases over time as we age (2nd law of thermodynamics).
When people think about noise in risk management, I think they often miss the boat a little bit. They understand the elements that Kahneman describes in the book, which is a great starting point, but they miss the bigger picture. Every single thought, sensation, behavior, social interaction, and so on, is influenced by noise. Even the simplest of perceptual tasks are measurably influenced by noise. In the field of experimental psychology and psychophysics (no not crazy physics as fun as that would be) these concepts have been fundamental to how we think about perception, behavior, and the underpinnings of decision-making for over 150 years (dating back to Weber-Fechner Laws) and beyond. Concepts like “discriminal dispersion” which was introduced by Thurstone almost a hundred years ago (building on Weber’s and Fechner’s foundations) in his paper “The Law of Comparative Judgement”. Furthermore, these elements have been studied and expanded upon consistently over the past 50 years. Work from Lester Krueger and Philip Allen (and many others there is a long list of great researchers that spring to mind, but I won’t list them all out) inspired me to study this more and more. Interestingly, all of the probability concepts that are covered in the more quantitatively rigorous areas of risk management and probability theory align perfectly with these ideas which was largely my inspiration for joining Hubbard Decision Research in the first place.
Tying this back to risk management and the broader inspiration for me writing this came from a recent podcast titled “Unlocking Resilience. Mass Media & Prioritization.” with Brandon Daniels and David Merritt (I’ll put the link to that podcast at the bottom as it’s worth a listen). There is a lot of great substance in the podcast, but one key point stuck out to me which was made by David Merritt around the 19-minute mark in the podcast and it has to do with how to prioritize human attention and, ultimately, optimize those precious finite human resources. While this was one item in a broader conversation, it made me stop on my walk with my dog and write down a note on my phone’s notepad. Human attention, human cognition, and human performance in general is fundamentally influenced by noise and developing a risk quantification framework that buttresses and supports decision makers in the face of inevitable (and neurologically fundamental) noise is essential. Risk management at large organizations is complicated; there are so many moving pieces. Providing the right people with the right tools to make better strategic decisions under uncertainty and target the right risks ultimately requires a consistent, unambiguous, and stable approach to risk management despite the internal noise that we deal with as biological beings.
Doug Hubbard repeatedly says when we talk to clients (and he’s not alone in the risk quantification space with this) that “I’d rather not have to do that math in my head”. The field of quantitative risk management is, in essence, eclectic with psychology being an important, and often overlooked area. Understanding how foundational concepts within psychology apply to risk management is a competitive advantage. Essentially, every single cognitive process is in some way limited or capped. Recognizing those limitations and developing solutions to minimize the impact of those limitations (such as developing quantitative risk models rather than relying on unaided intuition or replacing sub-optimal qualitative scoring approaches which actually add more noise with even simple quantitative models) will protect organizations from their best (yet most flawed) asset, their people (most flawed might be an exaggeration but it helps get the point across).
Unlocking Resilience. Mass Med… – Cybercrime Magazine Podcast – Apple Podcasts
