Cognitive biases every risk manager must know (part 1)

Overconfidence bias

The overconfidence effect is a well-established bias in which a person’s subjective confidence in his or her judgments is reliably greater than the objective accuracy of those judgments, especially when confidence is relatively high.

Throughout the research literature, overconfidence has been defined in three distinct ways: (1) overestimation of one’s actual performance; (2) overplacement of one’s performance relative to others; and (3) overprecision in expressing unwarranted certainty in the accuracy of one’s beliefs.

https://en.wikipedia.org/wiki/Overconfidence_effect

TESTS:
http://www.tim-richardson.net/misc/estimation_quiz.html
http://confidence.success-equation.com/


Normalcy bias

 

The normalcy bias, or normality bias, is a mental state people enter when facing a disaster. It causes people to underestimate both the possibility of a disaster and its possible effects. This may result in situations where people fail to adequately prepare and, on a larger scale, the failure of governments to include the populace in its disaster preparations.

The assumption that is made in the case of the normalcy bias is that since a disaster never has occurred, it never will occur. It can result in the inability of people to cope with a disaster once it occurs. People with a normalcy bias have difficulties reacting to something they have not experienced before. People also tend to interpret warnings in the most optimistic way possible, seizing on any ambiguities to infer a less serious situation.

Check out other risk management books

Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective Risk Management
The Standard for Risk Management in Portfolios, Programs, and Projects

The opposite of normalcy bias would be overreaction, or “worst-case thinking” bias,[1][2] in which small deviations from normality are dealt with as signaling an impending catastrophe.

https://en.wikipedia.org/wiki/Normalcy_bias


Omission bias

The omission bias is an alleged type of cognitive bias. It is the tendency to judge harmful actions as worse, or less moral than equally harmful omissions (inactions) because actions are more obvious than inactions. It is contentious as to whether this represents a systematic error in thinking, or is supported by a substantive moral theory. For a consequentialist, judging harmful actions as worse than inaction would indeed be inconsistent, but deontological ethics may, and normally does, draw a moral distinction between doing and allowing.

https://en.wikipedia.org/wiki/Omission_bias


 

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