and attention that they deserve.
• The rational approaches are more complex to implement, requiring higher levels of discipline, extra time and potentially other investments; intuitive processes require less effort, and match many people's inherent personal preference for verbal communication and rapid action. In this context, some well-known quotes come to mind: “Opinion is the medium between knowledge and ignorance” (Plato), and “Too often we enjoy the comfort of opinion without the discomfort of thought” (John F. Kennedy).
• However much rational analysis has been conducted, management judgement (or intuition) will typically still need to play an important role in many decisions: very few situations can be understood perfectly, with all factors or risks identified and correctly captured. For example, some qualitative factors may not have been represented in the common terms required for a quantitative model (i.e. typically in financial terms). In addition, and as a minimum, there will always be some “unknown unknowns” that decision-makers need to be mindful of.
Thus, ideally a robust and objective rational analysis would help to develop and inform a decision-maker's intuition (especially in the earlier stages of a decision process), and also to support and reinforce it (in later stages). Where there is a mismatch between the intuition of a particular decision-maker and the results of a rational analysis, in the first instance, one may look for areas where the rational analysis is incomplete or based on incorrect assumptions: there could be factors that are important to a decision-maker that an analytic-driven team is not aware of; ideally these would be incorporated as far as possible in revised and more robust rational analysis. On the other hand, there may be cases where even once such factors are included, the rational and intuitive approaches diverge in their recommendations. This may lead one to be able to show that the original intuition was incorrect and also to the drivers of this; of course, generally in such cases, there may be extra rounds of communication that are required with a decision-maker to explain the relevant issues. In other words, genuinely rational and objective analysis should be aligned with intuition, and may serve to modify understanding and generate further intuition in parallel.
The importance of intuitive decision-making, coupled with the presence of potential biases, will create yet more challenges to the implementation of rational and disciplined approaches to risk assessment. Biases may be thought of as those that are:
• Motivational or political. These are where one has some incentive to deliberately bias a process, a set of results or assumptions used.
• Cognitive. These are biases that are inherent to the human psyche, and often believed to have arisen for evolutionary reasons.
• Structural. These are situations where a particular type of approach inherently creates biases in the results, as a result of the methodology and tools used.
Motivational or political biases are common in many real-life decision situations, often resulting in optimistic scenarios being presented as a base case, or risks being ignored, for many reasons:
• The benefits and cost may not have unequal or asymmetric impacts on different entities or people. For example, project implementation may allow (or require) one department to expand significantly, but may require another to be restructured.
• “Ignorance is bliss.” In some cases, there can be a lack of a willingness to even consider the existence of risks. There are certainly contexts in which this reluctance may be justified (in terms of serving a general good): this would most typically apply where the fundamental stability of a system depends on the confidence of others and credibility of actions, and especially where any lack of confidence can become detrimental or self-fulfilling. In such cases, the admission that certain risks are present can be taboo or not helpful. For example:
• A banking regulator may be reluctant to disclose which institutions are most at risk from bankruptcy in the event of a severe economic downturn. The loss of confidence that may result could produce a run on the bank, in a self-fulfilling cycle (in which depositors withdraw their money due to perceived weakness, which then does weaken the institution in reality, and also may have a knock-on effect at other institutions).
• A central bank (such as the European Central Bank) may be unwilling to publicly admit that certain risks even exist (for example, the risk of a currency break-up, or of one country leaving the eurozone).
• Generally, some potential credit (or refinancing) events may be self-fulfilling. For example, a rumour (even if initially false) that a company has insufficient short-term funds to pay its suppliers may lead to an unwillingness on the part of banks to lend to that company, thus potentially turning the rumour into reality.
• A pilot needing to conduct an emergency landing of an aeroplane will no doubt try to reassure the passengers and crew that this is a well-rehearsed procedure, and not focus on the risks of doing so. Any panic within the passengers could ultimately be detrimental and hinder the preparations for evacuation of the aircraft, for example.
• Accountability and incentives. In some cases, there may be a benefit (or perceived benefit) to a specific party of underestimating or ignoring risks. For example:
• In negotiations (whether about contracts, mergers and acquisitions or with suppliers), the general increased information and transparency that is associated with admitting specific risks exist could be detrimental (to the party doing so).
• Many publicly quoted companies are required to make a disclosure of risks in their filing with stock market regulators. Generally, companies are reluctant to provide the information in any more detail than is mandated, in order not to be perceived as having a business that is more risky than competitors; a first-mover in such disclosure may end up with a consequential drop in share price. Therefore, such disclosures most typically are made at a very high level, are rather legalistic in nature and generally do not allow external analysts to truly understand or model risks in the business in practice.
• “Don't worry, be happy” (or “We are too busy to (definitely) spend time considering things that may never happen!” or “You are always so pessimistic!”). In a similar way to the “ignorance is bliss” concept, since identified risks are only potential, and may never happen, there is often an incentive to deny that such risks exist, or that they are not material, or to insist that they can be dealt with on an ad hoc basis as they arise. In particular, due to implementation time and other factors, it is often the case that accountability is only considered at much later points in time (perhaps several years); by which time the truly accountable person has generally moved to a different role, been promoted, or retired. In addition, defenders of such positions will be able to construct arguments that the adverse events could not have been foreseen, or were someone else's responsibility, or were due to non-controllable factors in the external environment, and so on. Thus, it is often perceived as being more beneficial to deny the existence of a problem, or claim that any issues would in any case be resolvable as they arise. For example:
• A senior manager or politician may insist that a project is still on track despite some indications to the contrary, although the reality of the poor outcome is only likely to be finally seen in several years or decades.
• A manager might not admit that there is a chance of longer-term targets being missed or objectives not being met (until such things happen).
• A project manager might not want to accept that there is a risk of a project being delivered late, or over budget, or not achieving its objectives (until the events that provoke it actually occur).
• Management might not want to state that due to a deterioration in business conditions there is a risk that employees will be made redundant (until it actually happens).
• A service company bidding for a contract
