| 17-7-2017 | Theo Paardekooper |
Management decisions are generally made based on analysis of data. However, this statement is far from correct. Arguments count, too. However, having the correct arguments does not mean that they are convincing. Being right is not the same as getting what you want.
How is this possible? If you are in full control of this principle, every action will become a success. To understand this principle we have to get involved in the world of behavioral finance. It is the cross section of economics and psychology. As a treasurer or financial professional you have to discuss issues regularly with your management and some background on this topic might come handy now and then.
One of the main biases is the risk appetite of a human being. People are risk averse if they can get a profit, but they are risk minded to make a profit to reduce former losses.
Another bias is about the difference between perceived risk and actual risks. A human being expects that small risky events will occur more often, than high-risk events. For this reason people buy a lot of insurance products that will cover these small risks, like travelling insurance, biking insurance, etc. Also the success of big lotteries is linked to this bias. The chance to win a million Euro’s in a lottery is as big as the risk to get involved in a car accident.
Decision-making is highly influenced by former experience. This can create a bounded awareness on the topic. People can get overconfident about their opinion or over-optimistic about the likelihood of outcomes of actions. People who are overconfident are often surprised, while people who are over-optimistic are often disappointed.
Every human being is influenced by bounded awareness. Just take a look at the example.
Didn’t you spot the gorilla? If you didn’t don’t be ashamed; almost half of all people don’t see it.
Decision-making is often a group process. Groups have effect on decision making by itself.
Just take a look at the following experiment.
It is hard to understand but from a behavioural perspective it is not important to know why, but it is important to know how. If you can use these non-rational principles to influence the decision making process, it will help you to convince everyone.
Are you convinced, if not, I probably forgot some other non-rational principles…
Independent treasury specialist