For long we have known about behavioural science that deals with the subject of human actions. During the initial days, the focus was mostly on understanding people while recruiting, and figuring out their training needs. That is to say, what kind of behaviour will suit the organisation and what intervention may be needed to fine-tune their behaviour were the primary concerns, if not the only ones.

With the passage of time it came to be realised that human actions spread across many domains, and also vary with changes in context. Consider a person making purchasing decisions, where variation in behaviour can be witnessed across products — for example, extremely brand conscious while buying a bottle of shampoo, but indifferent in case of hair oil. Also, purchase decision changes when shopping alone and when accompanied by friends or family. These realisations made consumer behaviour a useful sub-discipline.

Take the case of finance-related behaviour. While conventional academic finance emphasised theories, such as modern portfolio theory and efficient market hypothesis, behavioural finance investigated the cognitive factors and emotional issues that impacted the decision-making process. That said, thus far investigations mostly focussed on the behavioural aspects of a prospective recruit, customer or an investor and use that knowledge for approaching the client system.

Attitude to risk

The new dimension being added now is, trying to understand employees attitudes’ towards risk. In the wealth-management industry, it’s become a given that it is not enough to analyse just risks themselves, but also how different people respond to them. This information is now being used to improve operations and build more effective teams.

In other words, the focus here is to understand your employees better, rather than the customer. Firms are increasingly using sophisticated personality profiling tools to understand how their employees think and feel about risk, so that they can tap into employees’ strengths and improve teamwork and decision-making.

By so doing, they are able to ward off, at least partially, the threats they face on a daily basis, which can spiral into major crises. July Graham, Deputy CEO and Technical Director of Airmic, the London-based risk management and insurance trade association, observed “personality profiling is relatively new, but there is rising interest in risk management circles and in business more generally”.

Risk personality assessments have taken particular hold in industries in which people factors can have a profound impact in risk decisions and behaviours. Knowingly or unknowingly, our cricket selection committees may be doing such assessments as they select teams to play against different countries — keeping in mind the conditions, type of pitches, players’ skills, etc.

Developments such as Cambridge Code, risk type compass, and similar other tools have paved the way to move in this direction. Risk type compass assesses the people side of risk, and how this impacts our individual approaches to decision-making. Risk dispositions impact the decision making of individuals, the inter-personal dynamics of teams and risk culture of organisations.

Useful insights

Knowing how each individual perceives and reacts to risk and uncertainty — the way they deal with continuous flow of conscious and unconscious decisions — provides useful insight into decision-making effectiveness. Now the companies can better understand how different employees think and feel about risk; thus helping them in design and selection of teams.

It is not clear if this thinking evolved from the problem-structuring approach used in soft systems methodology, which believes that managers live in a world of ever-changing flux of interacting events and ideas and that the management is reacting to that flux to achieve organised action.

The writer is former Dean and Director-in-Charge, IIM Lucknow